Tax Planning for Families with College Students
It’s no secret that tuition rates for college have been increasing at a staggering rate; the average yearly rate for in-state tuition is $8,244 and $20,770 for out-of-state. These figures do not include room and board, books, or supplies. Parents are wisely advised to be prudent and start saving for these expenses while their children are young. Fortunately, there are many options available to help families pay for their children’s education. Here are three popular options available to you, please feel free to contact Hoffman & Associates at 404-255-7400 for more information.
1. Dependency Exemption for Children in College:
Since the majority of students have little or no tax liability while in school it is often beneficial for parents to claim them as dependents. In order to qualify, an appropriate relationship must exist. The student can be the taxpayer’s own child, a descendant, a brother or sister, or a descendant’s brother or sister. A qualifying child must have the same residence as the taxpayer, or live away from home while in college. The child must be under age 19 or be enrolled full time and under the age of 24. Generally, the student must not provide over half of their own support and student loans are counted in that calculation. Finally, the student must not be married and filing a joint return unless solely to claim a refund.
2. Education Deductions and Credits
Interest expense on qualified education loans is deductible if the taxpayer meets the income limitations. The loans must pay for educational expenses for either the taxpayer, spouse or dependent. Up to $2,500 per year of interest paid on education loans is deductible. This deduction may not be available if the gross income is over $75,000 for a single filer and over $150,000 for married filers. The deduction is not available if the loan is under the students name or if married tax payers file taxes separately.
3. Education Credits
The American Opportunity Tax Credit offers up to $2,500 per student for the first four years of college. the first $2,000 is a dollar-for-dollar credit for qualified educational expenses. The other $500 represents 25% of the next $2,000 of qualified expenses. This credit cannot be used for room and board. The Lifetime Learning Credit is 20% of the first $10,000 of qualified educational expenses with a maximum of $2,000 for any taxpayer. This credit is not limited to the first four years of college, so it is available for graduate school. This credit cannot be used for room and board or books and course materials.
