As the fall semester kicks off at colleges across the country, students and parents should be doing their homework on what educational expenses can be deducted.
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Naturally, there is nothing straightforward in the tax law regarding the deductibility of secondary education. According to Dave Du Val of Taxaudit.com, “When someone comes in on April 15, there are very few things that can be changed. It’s a done deal. The rules for education may be difficult to understand and knowing what to keep may be a question.”
Anyone intending to take an education tax credit needs to understand the ins and outs of the tax law governing this issue.
There are two major college credits available: the American Opportunity Credit or the Lifetime Learning Credit. The income thresholds for enjoying the American Opportunity Credit are $180,000 if married filing jointly or $90,000 if single, head of household, or qualifying widow(er). For the Lifetime Learning Credit the thresholds are: $127,000 if married filing jointly or $63,000 if single, head of household, or qualifying widow(er).
If you have no tax liability, you generally will not receive the benefit of any tax credits. However, when it comes to education credits, 40% of the credit may be refundable to you.
When it comes to who gets the deduction, Du Val calls the tax code “convoluted.”
"For example, it’s not who paid for the education, it’s who claims the dependent who gets to take the credit. A parent who claims the dependent will be able to claim a credit for tuition and other payments paid for by Grandma or Uncle Fred.”
And it’s not just tuition that is deductible. “Don’t forget about the laptop you bought for Johnny for school. Keep the receipt. It can be added to other education costs to compute the credit,” Du Val explains.
Any school that offers student loans backed by the government is considered a qualified institution to the IRS, according to Du Val.
Education-related costs that can be deducted include: tuition, fees, and required books and equipment. “You must buy the book from the college and it must be required for admission otherwise it won’t qualify for the Lifetime Learning credit. However, it will qualify for the American Opportunity Credit. How do they expect the American taxpayers to understand this?”
I’m often asked if income from scholarships is includable in income. According to the IRS, a scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution and the amount of the funding does not exceed your expenses. The funding must not be designated for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. There may be some exceptions to the latter. Read IRS Publication 970 for more information not just on scholarships and fellowships but on all the requirements for education credits.
Du Val offers one final hint: “Moving expense to college is not deductible, but it could be deductible when moving from college to your first job.”
And finally, be sure to keep good records, pictures, and receipts in order to justify any expenses. If anything goes to audit or tax court, the IRS will look for the records to substantiate the credits taken.