Money Management: Taxes and education

Money Management: Taxes and education

Posted: Wednesday, March 23, 2011 6:02 pm

It’s no secret that sticker shock sets in quickly when you’re looking at education expenses. The price for yearly tuition alone can range from nearly $8,000 at public four-year colleges for in-state students to an eye-popping $35,000 or more at private four-year institutions, according to the College Board. And those amounts don’t include the cost of room and board as well as other expenses. The good news is that the tax laws offer a number of opportunities to minimize your out-of-pocket education costs, if you know how to make the most of them.  The Tennessee Society of CPAs provides these valuable tips. 

• An Important Credit Extended

Late last year, Congress voted to extend the American Opportunity Credit (AOC), which taxpayers can use to reduce their tax burden, for two years. Since 2009, it’s been possible to qualify for this credit for as much as $2,500 per student per year for qualified tuition and expenses during the first four years of post-secondary education. The credit covers not only school fees, but also course materials, which might include books, supplies and equipment. There are income limits on who can qualify for the credit, so check with your CPA to learn whether it applies in your situation. Keep in mind, too, that you can’t claim the credit unless you are enrolled at least half-time. 

• The Lifetime 

Learning Credit

If the AOC doesn’t fit your situation, look into the Lifetime Learning Credit. It is worth up to $2,000 per year for qualifying students and covers an unlimited number of years of education. It can be used for students who are going to school part-time and for classes that don’t necessarily lead to a degree. There are income limits, so ask your CPA for more details.  

• Tax Advantages for Loans and Scholarships

Many students who carry a heavy debt load to finance their college education will be happy to hear that it’s possible to deduct up to $2,500 of the interest paid on a student loan, even if you don’t itemize deductions. To qualify, the loan proceeds must have been used for specific educational expenses, such as tuition, housing and board, fees, books, supplies, transportation and other related costs specified by the IRS. Once again, income limits apply; your CPA can tell you more about how they work.

• Scholarships and Employer-Paid Expenses

Students fortunate enough to receive a scholarship or fellowship should be aware that they are not taxable as long as the recipient is a degree candidate and uses the money to cover qualified education expenses at an eligible educational institution. If your employer is picking up the bill for some or all of your education, the first $5,250 they ante up each year is not subject to federal income taxes. The money can be used for undergraduate or graduate courses, and it is not taxable even if the courses are not work related. Qualifying expenses include tuition, fees and similar expenses, books, supplies and equipment.

• Tax Savings on 

Savings Bonds

Finally, U.S. savings bonds are a popular gift that recipients often use to help defray college costs. It may not be necessary to pay taxes on the interest earned on qualified U.S. series EE bonds issued after 1989 or a series I bonds if the taxpayer meets certain income limits and other requirements. Your CPA can explain whether your bonds qualify. 

About Money Management

Money Management is a column on personal finance that is a joint effort of the AICPA and the Tennessee Society of CPAs, as part of the profession’s nationwide 360 Degrees of Financial Literacy program. 

Members of TSCPA are CPAs residing and practicing primarily in Tennessee in all areas of public accounting, education, government, business and industry. TSCPA offers a speakers bureau for many types of business and educational engagements. For details, visit www.tscpa.com. TSCPA is headquartered in Brentwood.

wcp 3/22/11

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