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Families with college students may save tax on their 2017 returns with one of these breaks

2/15/2018
By
CPA, MT
Photo of Carol Polatas

College tuition is one of the largest financial challenges families face today. To help offset higher education costs, the Internal Revenue Service (IRS) has made several tax credits and deductions available to tax filers on their 2017 returns. However, your individual tax situation greatly determines which of these programs are available to you. 415 Group Senior Manager Carol Polatas, CPA, explains how taxpayers can take advantage of these breaks.

 

For so many of our clients, the cost of college tuition is a big part of their financial reality. However; for eligible taxpayers who meet income limits, the IRS has put provisions into place, such as tax credits and deductions, to help ease the burden of higher education expenses.

Selecting the right credit or deduction is one of the biggest ways you can take full advantage of these programs on your tax return. I’ve seen a lot of confusion when it comes to understanding how credits and deductions affect your tax picture. In most cases, I recommend taking a credit over a deduction. That’s because a tax credit is a dollar-for-dollar reduction to your tax bill, while a deduction only reduces the amount of income taxed.

But beyond choosing the right credit or deduction, it’s very important to understand who and what expenses are eligible for these programs. The IRS also disallows “double-dipping” or utilizing more than one tax benefit for the same educational expenses. For instance, if education expenses were paid from a tax-advantaged account, such as a 529 plan, then those expenses would be ineligible.

While these programs can be very beneficial, your specific tax situation determines your eligibility, which makes choosing the right one so important. That’s where I see 415 Group providing the most value. We know the ins and outs of these provisions, and we know how they affect your total tax picture.

Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.

But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.

Higher education breaks 101

While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So first you need to see which breaks you’re eligible for. Then you need to determine which one will provide the greatest benefit.

Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.

Credits

Two credits are available for higher education expenses:

  1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
  2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phaseouts apply to these credits.

If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.

Deductions

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

Be aware that the tuition and fees deduction was extended only through December 31, 2017. So it won’t be available on your 2018 return unless Congress extends it again or makes it permanent.

Maximizing your savings

If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2017 tax returns — and which will provide the greatest tax savings — please contact us.

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