The education of
your children, or even of yourself and your spouse, can be a major investment.
Knowing if your college-age child is still a dependent, what scholarships are
taxable, and which tax credits are available can be confusing. You need to
consider your situation to determine which options are best for you. Tax
planning is essential to make the most of these benefits. You need to know
which one of the options are best for you based on your income the varying
definition of allowable expenses. You should also consider issues such as the
student's eligibility for financial aid and who has control over the money
used for college. In certain circumstances, it might be better to have the
child pay the education expenses rather than the parent.
following in mind when determining the best way to claim a tax break for
- Is the student a dependent?
- Does the student
have any Scholarships or Grants?
- Did you pay any student loan
- Does the student have a Coverdell Education Savings
- Does the student have a Qualified Tuition Program?
- What are the Education Credits?
- Does the student have eligible
Whether a student is claimed
as a dependent on your tax return may affect yours, or the student's
eligibility, for the different tax benefits available for education
A student is someone enrolled in school full-time for at
least five months out of the calendar year. A full-time student under age 24
who has a job may still be claimed as a dependent on their parents' return.
Scholarships and Grants
If a student is a candidate for a
degree, they can exclude from income the amount of scholarship or grant used
for tuition, books, and fees. The amount of the scholarship or grant that is
used for room and board or for teaching or research is considered taxable
income even if the teaching or research is a condition for receiving the
scholarship or grant.
Students who win a scholarship prize in a contest
must include the amount as prize winnings on their tax return unless the prize
is designated to be used for educational purposes only.
scholarships received from the Department of Veterans Affairs, National Health
Services Corps Scholarship Programs or by the Armed Forces Health Professions
Scholarship and Financial Assistance Program are not included in income.
Student Loan Interest Deduction
You may be able to deduct
up to $2,500 of interest you paid on a qualified student loan to attend an
accredited, higher educational institution. The loan must have been for you,
your spouse, or someone you claimed as your dependent when you took out the
loan. This deduction is an adjustment to income so you can claim it even if you
do not itemize deductions on Schedule A, Itemized Deductions. Your modified
adjusted gross income must be less than $75,000 ($150,000 if Married Filing
Jointly). If you are filing Married Filing Separately, you cannot take this
Coverdell Education Savings Account
The Coverdell Education Savings Account (Coverdell ESA)
is an account for the sole purpose of paying for the qualified education
expenses of the designated beneficiary of the account.
can use the funds in the Coverdell ESA to pay for their qualified expenses of
attending a public, private, or religious school at the elementary, secondary
or higher education levels. Qualified expenses include books, tutoring,
computer equipment, software and services, room and board, uniforms,
extended-day program costs, and the expenses of an individual with special
needs that are necessary for that person's enrollment or attendance at an
eligible educational institution.
Anyone, including the beneficiary,
can establish and contribute to this account but contributions can not exceed
$2,000 per year, per beneficiary. You can make a contribution to a Coverdell
ESA if your modified adjusted gross income for the year is less than $110,000
($220,000 if Married Filing Jointly). If your modified adjusted gross income
is above the limit, it is possible for you to provide the beneficiary with
the money as a gift and have the beneficiary make the contribution on their
own behalf, as long as the beneficiary's income is not over the limit. No
contributions can be made to the account once the beneficiary turns age 18,
unless the beneficiary is an individual with special needs.
contributions are not tax deductible but earnings are tax free to the
beneficiary if they are used to pay for qualified education expenses. A 10%
penalty may apply to a distribution that is not applied to qualified education
expenses. Money remaining in the account after a beneficiary is no longer in
school can be rolled into another family member's Coverdell ESA account tax
free if certain conditions are met.
Contributions to a Coverdell ESA
are considered a gift from the contributor to the beneficiary and are
eligible for the annual gift tax exclusion.
Qualified Tuition Program
A Qualified Tuition Program (QTP or Section 529 plan) is a
program that allows you to prepay a student's college tuition or contribute to
a higher education savings account for payment of qualified higher education
expenses. Qualified expenses include books, supplies, equipment, and room and
board if the student is attending at least half-time. Half-time attendance is
defined by the institution. Plans can be established by a state agency or by a
qualified educational institution. You are not restricted to investing in
your state's plan, but contributions to your own state's plan may qualify you
for certain additional tax benefits on your state tax return.
Contributions to a QTP are not tax deductible. If not used for qualified
educational expenses, distributions may be subject to a 10% additional tax.
Money remaining in the account after paying for a beneficiary's qualified
expenses can be rolled into another family member's QTP account tax free if
certain conditions are met.
Contributions to a QTP are also considered
a gift from the contributor to the beneficiary and are eligible for the annual
gift tax exclusion.
You can contribute to both a QTP and a Coverdell
education savings account in the same year for the same beneficiary.
Higher Education Credits
The following two tax credits are
available to taxpayers who pay higher education costs:
American Opportunity Credit - Available through 2017
- The Lifetime
The American Opportunity Credit is a credit of
up to $2,500 for the qualified tuition and related expenses paid for each
eligible student. The credit is 100% of the first $2,000 of qualified
expenses plus 25% of the next $2,000 of qualified expenses paid per student.
It can be claimed for the first four years of postsecondary education for
each student. The student must be enrolled at least half time in a qualified
program and must not have been convicted of a felony drug offense. Eligible
expenses include tuition, required fees, and the cost of required books and
software for courses.
You do not qualify for the credit if your modified
adjusted gross income is greater than $90,000 or $180,000 if married filing
The American Opportunity Credit is unique in the fact that it
combines both a nonrefundable and a refundable credit in one. The first 40% of
the credit up to $1,000 is refundable with the balance of the credit treated
as a nonrefundable credit. This unique feature allows you to receive the
refundable portion of the credit as a refund if you have no remaining
You may be able to claim a Lifetime Learning Credit of up to
$2,000 each year for the total qualified tuition and related expenses paid
during the tax year for all eligible students who are enrolled in eligible
educational institutions. This credit is 20% of the first $10,000 of
qualified expenses paid per tax return. Unlike the American Opportunity
Credit, the Lifetime Learning Credit is not based on the student's workload
and is not limited to the first two years of postsecondary education. Expenses
for graduate-level degree work are eligible. You do not qualify for the credit
if your income is greater than $65,000 ($130,000 if Married Filing Jointly).
The Lifetime Learning Credit is a nonrefundable credit. This means that if
your taxes are less than your credit, then you will lose any remaining credit
amount left after you reduce your income taxes to zero.
You do not
qualify for either credit if your filing status is Married Filing Separately.
In addition, you cannot claim both the American Opportunity Credit or the
Lifetime Learning Credit for a student in the same year.
You must claim the
student as a dependent to receive either education credit. If you do not
claim the student as a dependent, or if someone else is eligible to claim the
student as a dependent but elects not to, only the student may claim the
credit. A student claimed as a dependent on another person's tax return
cannot claim the credit. Claiming the American Opportunity Credit may be more
beneficial than claiming the Lifetime Learning Credit, if you are eligible
For example, Brad's filing status is Single, and he has
wages of $31,000. After allowing for the standard deduction and personal
exemption amount, his tax is $2,678. He is a sophomore in college and paid
$10,000 in qualified tuition expenses during the year as part of a degree
program. He has no other income or deductions. Brad has the choice of taking
the American Opportunity Credit or the Lifetime Learning Credit. He should
choose whichever option gives him the biggest tax savings:
Brad takes the Lifetime Learning Credit instead, he would save $2,000 in taxes
(the maximum credit amount) because his income is below the limits.
- If Brad takes the American Opportunity Credit instead, he would save
$2,500 in taxes (the maximum credit allowed) because his income is below the
The American Opportunity credit gives him $500 more
in tax savings than the Lifetime Learning credit would.
claim the American Opportunity Credit for the best bottom line on his tax
Education Savings Bond Program
You may exclude
interest on qualified U. S. savings bonds from your gross income if you have
paid qualified higher educational expenses during the redemption year. When
calculating the amount of higher education expenses paid during the year, you
may include any contribution of the bond proceeds to a QTP and any
contribution to a Coverdell ESA as a qualified expense. You do not qualify
for the exclusion if your filing status is Married Filing Separately or if
your modified adjusted gross income is $93,000 or more ($145,750 if
Married Filing Jointly) in the year the bond is redeemed.
Contact your neighborhood Jackson Hewitt office for more information or
assistance. Use the Office Locator available on this Web site or call
1-800-234-1040 to find the Jackson Hewitt location most convenient to