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.
Payments, or 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 deduction.
Tuition and Fees Deduction
You may be able to deduct up to $4,000 for qualified tuition and fees paid for higher education even if you do not itemize deductions. Qualified tuition and fees are amounts paid for you, your spouse, or a person whom you claim as your dependent. The tuition and fees must be required for enrollment or attendance at an eligible educational institution. You may qualify for the maximum $4,000 tuition and fees deduction if your modified adjusted gross income is $65,000 or less ($130,000 or less if Married Filing Jointly) or a reduced tuition and fees deduction of up to $2,000 if your modified adjusted gross income is greater than $65,000 ($130,000 if Married Filing Jointly) but not more than $80,000 ($160,000 if Married Filing Jointly). If your modified adjusted gross income is greater than $80,000 ($160,000 if Married Filing Jointly), you cannot take this deduction.
This deduction is not available:
- If the American Opportunity or Lifetime Learning Credit is claimed for the student.
- On returns filed with a Married Filing Separately filing status.
- To a person who can be claimed as a dependent on another person's return, even if the other person chooses not to claim the person as a dependent.
Qualified expenses used to claim the tuition and fees deduction must be reduced by any tax-free benefits received, such as distribution of earnings from a Qualified Tuition Program (QTP) or tax-free savings bond interest. Qualified expenses must also be reduced by the full amount of a Coverdell Education Savings Account (Coverdell ESA) distribution.
Education Savings Account (ESA)
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
the beneficiary 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.
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
The 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
Qualified Tuition Program (QTP)
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
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
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
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
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
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 both.
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
If 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 limits.
The American Opportunity
credit gives him $500 more in tax savings than the Lifetime Learning credit
Brad should claim the American Opportunity Credit for the best
bottom line on his tax return.
Education Savings Bond
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 you.