News & Articles

4 Tips for Claiming Higher Education Credits

Posted on Fri, Mar 24, 2017

The Internal Revenue Code offers two federal income tax credits for post-secondary education expenses: the American Opportunity credit, and the Lifetime Learning credit. (See "The Basics of Higher Education Credits" at right.)

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Tags: Higher Education, College Expenses, American Opportunity Credit

Tax-Advantaged Ways to Help Educate the Grandchildren

Posted on Wed, Feb 22, 2017

If you want to help your grandchildren through college, there are several options to help pay their expenses and trim your family's tax bill at the same time. Here are three tax-wise ideas:

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Tags: Tuition, Expenses, College Expenses

The Financial Rewards of Buying a Condo for Your Kid's College Housing

Posted on Wed, Jul 13, 2016

With real estate prices recovering in many markets, it might make sense to buy a condo where your child can live during college. He or she can live there while attending school, and you can avoid "throwing away" money on dorm costs or rent for an apartment. If you buy a place that has extra space, you also can rent it to your child's friend(s) to offset some of the ownership costs.

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Tags: Real Estate Taxes, College Expenses, PAL, Second Home

10 Midyear Tax Planning Moves Inspired by the PATH Act

Posted on Thu, Jun 02, 2016
Numerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, individuals and small business owners can plan ahead with these 10 midyear tax strategies inspired by the recent legislation.

5 Tax Breaks for Individuals

1. Consider tax breaks for college students. If you have a child in college this year, you may be eligible for tax benefits. The PATH Act makes the American Opportunity credit permanent and extends the tuition and fees deduction through 2016. Both of these breaks are subject to phaseouts based on income level. For each student, you may claim either the American Opportunity credit or the tuition and fees deduction, but not both. Thus, while it is possible to claim the credit and the deduction in the same year, you may not claim both for the same student. If your income is too high to take one of these breaks, your child might be eligible.

The PATH Act also permanently treats computers, computer equipment, software and Internet service as qualified expenses for Section 529 savings plans, so distributions for this purpose are tax-free. Summer planning can help maximize your tax benefits for costs incurred for the fall semester.

2. Shop for a new car. If you itemize deductions on your federal income tax return, you can generally deduct state and local income taxes paid for the year. As an alternative, however, you may claim a deduction for state and local sales taxes. This option — which has been permanently extended by the PATH Act — is generally beneficial to taxpayers in locales with low or no state or local income taxes. But it can also benefit taxpayers who make large purchases during the year, regardless of where they live.

The sales tax deduction is determined based on actual receipts or an IRS table that lists amounts for each state. If you opt to use the IRS table, you can add on the actual sales tax paid for certain "big-ticket items," such as cars or boats. If you're in the market for a new vehicle, remember this alternate tax deduction.

3. Transfer IRA funds directly to charity. After you turn age 70½, you must take required minimum distributions (RMDs) from your traditional IRAs, whether you want to or not. These RMDs are taxable in the tax year they're received.

Under a provision made permanent by the PATH Act, if you're age 70½ or older, you may transfer up to $100,000 directly from your IRA to a charity without any tax consequences. In other words, you can't claim a charitable deduction for these transfers, but the payouts aren't taxable either — even if they're used to satisfy your RMD. Act sooner rather than later to avoid year-end scrambling. Keep in mind that this is a per person benefit. Although both spouses may individually transfer up to $100,000 from an IRA to a charity, one spouse cannot "borrow" the other spouse's $100,000 to make a $200,000 transfer.

4. Gift property to a charity. Real estate owners can deduct the value of "conservation easements" made to a charity that preserve the property in its original condition. Charitable deductions for long-term capital gains property (appreciated property that's been held more than one year) are generally limited to 30% of the taxpayer's adjusted gross income (AGI). Any excess may be carried forward for up to 15 years.

Under enhancements made permanent by the PATH Act, the deduction threshold is raised to 50% of AGI (100% for farmers and ranchers) for conservation easements. Any excess may still be carried forward for up to 15 years. One catch, however, is that all such conservation donations must be made in perpetuity.

5. Install energy-saving equipment. Are you dreading the summer heat? It may be time to install a central air conditioning system. There are various requirements to qualify for the credit. First, the home must be your main home. Also, while the credit is generally equal to 10% of the cost of qualified energy-saving improvements, there is a lifetime credit limit of $500. Thus, if you've claimed the credit in a prior year, your current-year credit will be reduced accordingly. Other special dollar limits may apply. It's available for a wide range of items from central air to insulation.

The PATH Act extended the residential energy credit only through 2016. So, it's important to act before this tax-saving opportunity expires. (It may be extended again, but there are no guarantees.)

5 Tax Breaks for Small Businesses

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Tags: Tax, Gifts, Vehicle, Planning, Tax Breaks, College Expenses, PATH Act

Educate Yourself about the Tax benefits for higher education

Posted on Wed, Feb 24, 2016

Attending college or graduate school is one of the biggest investments you'll ever make — and spring is the time schools normally announce who's in and who's out. If you or your child (or grandchild) plans to attend an institution of higher learning in the fall, May 1 is often the deadline for selecting a school.

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Tags: Tuition, student loans, College Expenses, American Opportunity Credit, Lifetime Learning Credit

Last-Minute Tax Savings: Hurry Before Time Runs Out

Posted on Mon, Dec 07, 2015

Another tax year is drawing to a close. But there's still time for individual taxpayers to trim their tax liabilities for 2015 and beyond, before the New Year begins. Here are 10 eleventh-hour moves that you can still make before the clock strikes midnight on January 1.

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Tags: Tax, Roth IRA, Charitable Donations, College Expenses, RMD

How College Financial Aid Benefits Are Taxed

Posted on Mon, Jul 20, 2015

There's no doubt about it ... college is expensive. At top-rated private universities, the annual cost can be $55,000 and up. Some public schools charge out-of-state students $40,000 and up. With any luck, however, your child or grandchild will qualify for financial aid. These days, a surprisingly high percentage of students do.

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Tags: Tax, EHTC Article, Newsletter, College Expenses, Financial Aid

Investing in College: Tax Credits & Other Tips to Maximize Tax Return

Posted on Thu, Oct 02, 2014

With the school year now in full swing, many people are thinking about ways to lower college costs for their children and grandchildren. The College Board estimates that the average cost of college for the 2013-2014 school year was $40,917 at private not-for-profit four-year colleges and $18,391 for state residents at public four-year universities. These figures include tuition, fees, room and board. But they don't cover incidentals, such as books, supplies, transportation and personal expenses.

If college expenses increase at 1.5 percent annually over the next 18 years, a baby born in 2014 can expect to pay roughly $54,000 for his or her freshman year at a private university (or nearly $24,000 for a state resident at a public university). Statistics like these cause many people to question whether the benefits of obtaining a college degree outweigh the mounting costs.

Selection Criteria to Improve Your Return on Investment

Costs vary substantially from one college to the next. Many prospective students and their families select their educational institutions carefully to keep costs at bay. In addition to the school's price tag, students should add these selection criteria to their list of must-haves:

On-time graduation rate. The sure-fire way to break the budget is to stay in college for an extra year (or longer). Schools with high on-time graduation rates typically provide rigorous advisory services that keep students on track.

Strong business ties. Pick a college that works with outside organizations to provide internships to students. Students may earn college credit, on-the-job training and extra spending money. In addition, interns who prove themselves worthy may receive job offers. 

Career services. Many of today's college graduates have trouble finding employment in their chosen fields of study. Pick a school that hosts job fairs and provides career services that help place students in paying jobs as soon as possible after graduation.

Valuing a College Degree

A recent study attempts to answer this question. In September, the Federal Reserve Bank of New York reported on the value of a college degree, using two common financial investment metrics: Net present value and accounting payback period. The study estimates the average incremental cash flows that college graduates earn over people with only high school diplomas.

Outflows. Incremental outflows include tuition and fees over four years of college. They also include the "opportunity cost" of foregone earnings as undergraduates pursue an undergraduate degree, rather than earn money in the real world.

Inflows. Incremental inflows are measured by the "college wage premium" over a 40-year career. This premium is reported quarterly by the U.S. Bureau of Labor Statistics in its Usual Weekly Earnings Summary. It represents the extra wages the average college graduate earns compared to the average high school graduate. For example, in the second quarter of 2014, the average person with a college degree earned $1,187 per week, compared to $666 for the average high school graduate. This equates to a college wage premium of $521 (or 78 percent) per week.

The study estimates that the net present value of these cash outflows and inflows over the average person's career is roughly $300,000, assuming a 5 percent discount rate. After adjusting for inflation, this value has remained constant since the late 1990s.

The accounting payback period -- the number of years it takes to recoup the initial cash outflows without considering the time value of money -- is approximately ten years, according to the study. This metric has fallen over time and is near its all-time low, which supports the hypothesis that a college degree is a smart investment.

Of course, this study isn't perfect. It assumes that a student will complete college in four years -- although many students take five years (or longer) to graduate. It also assumes that college graduates will earn the "college wage premium" right away -- although many of today's graduates are unemployed or under-employed after graduation. And it fails to consider that the typical college graduate may possess innate skills and abilities that would enable him or her to earn more money, regardless of education level.

Part of the appeal of the Federal Reserve Bank of New York study, however, is that it frames the decision to pursue a college degree as an investment decision. The study looks at the run-of-the-mill scenario. However, students and their family members can take steps to improve the return on investment by lowering costs.

Choosing Your Tax Credit

Tax credits can help lower costs by offsetting your tax bill dollar-for-dollar. (Note: The federal tuition and fees deduction for higher education costs expired Dec. 31, 2013. Under current law, the deduction is not available for tax years after 2013. However, tax credits are better than tax deductions, which simply reduce the amount of income that's subject to taxes.)

A recent IRS news release urges students and parents to review the eligibility criteria for education tax benefits now, before the 2014 tax filing season begins. Two credits are available to taxpayers who pay qualifying expenses for an eligible student.

Eligible students include the taxpayer and his or her spouse and dependents who are enrolled in an eligible college, university or vocational program. Taxpayers don't need to itemize their deductions in order to qualify for these credits. However, neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone who's claimed as a dependent on another person's return.

Although you may qualify for both, you can only claim one credit per student in a given tax year. Here's some information to help you decide which works best for your student.

American Opportunity Tax Credit. For most undergraduate students, this credit will generate greater tax savings than the Lifetime Learning Credit (below). The American Opportunity Tax Credit provides a credit for each eligible student. (If you have more than one dependent enrolled in college, this is important to note, because you might be eligible to claim the American Opportunity Tax Credit on each eligible student.)

The maximum annual American Opportunity Tax Credit is $2,500 per student. But the following rules and restrictions may limit your credit:

  • It's only available for four tax years per eligible student.
  • It's available only if the student hasn't completed the first four years of post-secondary education before 2014.
  • It's only available to students who were enrolled at least half-time for at least one academic period beginning in the tax year.
  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The American Opportunity Tax Credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 for married couples filing a joint return). The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more ($90,000 or more for singles, heads of household and some widows and widowers).
  • Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

Lifetime Learning Credit. This credit provides a maximum credit per tax return (not per student). Although this credit is available for both graduate and undergraduate students, it generally works better for part-time and graduate school students.

The maximum annual Lifetime Learning Credit is $2,000 per tax return. This credit is not refundable, so if you owe no taxes, you lose out on the benefit. Although the half-time student requirement does not apply to the Lifetime Learning Credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other rules and restrictions include:

  • There's no limit on the number of years you can claim the Lifetime Learning Credit.
  • Tuition and fees required for enrollment or attendance qualify as eligible expenses, as do other fees required for the course. Additional expenses do not.
  • The Lifetime Learning Credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower for this credit than for the American Opportunity Tax Credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less ($108,000 for married couples filing a joint return). The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more ($64,000 or more for singles, heads of household and some widows and widowers).

Applying For Your Credit

There are several differences and similarities between the American Opportunity Tax Credit and Lifetime Learning Credit. You can claim both benefits on the same return but not for the same student or same qualified expenses. In other words, there's no "double benefit" allowed.

By the end of January, taxpayers should receive a Form 1098-T, Tuition Statement, from their educational institution(s) for the previous year's tuition and other expenses. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. So, always consult with your tax adviser to ensure you claim the correct amounts and to explore tax advantaged ways to educate your children and grandchildren.

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Tags: EHTC Article, Tuition, Tax Credit, Newsletter, Articles, College Expenses, Taxes