09 Mar Do I qualify for college tax breaks?
Q. My son is a high school junior, and he’s going to a summer college program. I have college money saved in a 529 plan and an UTMA. Can I use those funds for tuition? Also, can I take any of the college tax breaks on my return?
A. You can use UTMA funds for your son’s college class, but you can’t use the 529 Plan. And either way, you won’t be able to take any of the college tax credits or deductions for on the tuition costs.
That’s because it would be like double-dipping. Those accounts have a favorable tax status, so unfortunately, you can’t have everything.
Your kid is still close to full-time college, though, so now is a great time to understand how distributions for college work.
The UTMA is a custodial account that’s actually owned by your child. Those funds don’t have to be used for college, but they can be. Spending the money down — for the benefit of the minor — before applying for financial aid can be a good strategy (if you can afford it) because those funds count more for financial aid than a 529 Plan, owned by you, would. That’s because funds in a child’s name count more heavily than funds in a parent’s name in financial aid formulas.
Make sure to understand any “kiddie tax” rules and tax implications before you take a withdrawal.
A 529 Plan is also known as a Qualified Tuition Program (QTP), said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
A QTP allows you to either prepay, or contribute to an account established for paying, a student’s qualified education expenses at an eligible educational institution,” he said.
“Funds paid out of a QTP are free of income tax if the funds are for qualified educational expenses and paid to a qualified educational institution,” Kiely said. “These expenses are: a) tuition and fees, b) expenses for special needs services, c) room and board for students who are enrolled at least half time.”
If you withdraw 529 Plan money for the summer college class, because your son is not enrolled half time at school, those funds would be subject to tax.
As for tax breaks for paying for college, you’re out of luck for this year. But maybe when your son goes full-time you will qualify.
First, there’s the tuition and fees deduction.
Generally, you can claim the up to $4,000 tuition and fees deduction if all three of the following requirements are met, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield:
1) You pay qualified education expenses of higher education – generally limited to tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.
2) You pay the education expenses for an eligible student.
3) The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
Note that you cannot take the deduction if your Modified Adjusted Gross Income (MAGI) exceeds $80,000 if single, head of household or qualifying widow(er), or $160,000 if married filing joint, Papetti said. No deduction can be claimed if married filing separate.
Then there’s the American Opportunity Credit.
“Generally, you can claim up to $2,500 of a credit against your income tax if certain requirements are met,” Papetti said. “One of the requirements is that your son be enrolled at least half-time, which like the observation noted with 529 Plan qualified distributions, attending a summer college course would not make him eligible for you to claim this credit.”
Finally, there’s the Lifetime Learning Credit, which Papetti said generally allows you to claim up to $2,000 of a credit against your income tax if all three of the following requirements are met:
1. You pay qualified education expenses of higher education – generally limited to tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.
2. You pay the education expenses for an eligible student.
3. The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
For purposes of the Lifetime Learning Credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution, Papetti said.
There is no requirement with this credit that the student be enrolled at least half-time but the tuition must be for a course offered by an Eligible Educational Institution, he said. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Papetti said you can’t take the deduction if your Modified Adjusted Gross Income (MAGI) exceeds $64,000 if single, head of household or qualifying widow(er), or $128,000 if married filing joint. No deduction can be claimed if married filing separate.
If you satisfy the requirements, and depending on how you pay for tuition, you may be able to take this credit for your son’s college summer course, Papetti said.
You can learn more about these credits by reading IRS publication 970.
Email your questions to .
This post first appeared in March 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.