In its most recent survey of college pricing, the College Board reports that a “moderate” college budget for an in-state public college for the 2016–2017 academic year averaged $24,610. A moderate budget at a private college averaged $49,320.
Many parents struggle with college expenses. You might think that the IRS is an unlikely place to seek help with paying for college but did you know that there are some significant tax benefits available for college?
According to a recent agency release, there are two specific college tax credits you or your dependent children may qualify for:
- The American Opportunity Tax Credit, (AOTC) can be worth a maximum annual benefit of $2,500 per eligible student. The credit is only available for the first four years at an eligible college or vocational school for students pursuing a degree or another recognized education credential. Taxpayers can claim the AOTC for a student enrolled in the first three months of 2018 as long as they paid qualified expenses in 2017.
- The Lifetime Learning Credit, (LLC) can have a maximum benefit of up to $2,000 per tax return for both graduate and undergraduate students. Unlike the AOTC, the limit on the LLC applies to each tax return rather than to each student. 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. The credit is available for an unlimited number of tax years.
Other college tax credits
The IRS also reminds taxpayers of these other college/educational tax benefits such as:
- Student loan interest can be deducted up to $2,500 per year. However, beware of the income limitations.
- Scholarship and fellowship grants are generally tax-free when they are used to pay for tuition, required enrollment fees, books and other course materials. However, they are taxable if used for room, board, research, travel or other expenses. So, use these funds wisely.
- If you are using eligible savings bonds to pay for college, interest is usually tax-free (subject to income limitations) if bonds were purchased after 1989 by a taxpayer who, at the time of purchase, was at least 24 years of age.
Programs specific to New Jersey & New York
In addition to the credits and tax breaks provided by the IRS to help with college expenses, there are also some plans and programs specific to New York and New Jersey. For example, New York is one of those states that has a pre-paid or “529 plan.” These 529 plans, so-called because Section 529 of the Internal Revenue Code specifies their tax advantages, are used by many families to prepay or save for a child’s college education. Contributions to a 529 plan are not deductible, but earnings are not subject to federal tax when used for qualified education expenses. What is really nice about New York’s 529 Plan, is that your child does not have to attend a school in New York. The money contributed to the account can be used to pay qualified higher-education expenses at any eligible school—college, university, vocational, trade, or graduate—anywhere in the United States or abroad. While contributions to the plan are not deductible on your federal income tax return, according to the plan, if you work in New York and pay New York State income taxes, you may be entitled to a state tax deduction of up to $5,000 ($10,000 if you’re married filing jointly).
New Jersey also has a 529 plan known as “NJ Best.” Like New York’s plan, it can be used at any accredited college, not just colleges or universities in New Jersey. However, students at New Jersey colleges and universities can receive a tax-free scholarship whose value increases along with time and investment in the plan.
With both plans there are no income restrictions, you can open a 529 plan regardless of how much or how little you earn and your investments grow free from federal and state income tax. Also qualified withdrawals are not subject to federal or state income tax.
How your tax professional can help
The goal of any tax professional is to help maximize your tax strategies for your entire family. If you have children who are soon to be college bound, or are already enrolled, your tax preparer can help you determine which of these benefits you may qualify for, as well as help you to develop an overall income tax strategy that can make paying for college as easy as possible for your given financial situation.
Steven Blumenthal, CPA is the Principal of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. He can be reached by telephone at (212) 931-9254 or email at firstname.lastname@example.org. Understanding how to take the greatest advantage of tax breaks for college can be complex. If you would like to benefit from MBAF CPA’s LLC’s expertise in these areas, or if you have further questions on this or any related topic, do not hesitate to contact their tax & accounting specialists at (212) 576-1400.