06 Mar Do I qualify for college tax breaks?
Q. How much do I need to pay out-of-pocket for my kid’s college tuition so I can qualify for the college tax breaks?
A. Whether or not you can take any of the college tax breaks depends on more than your out-of-pocket costs.
Your income has a lot to do with it.
First, there’s the American Opportunity Tax Credit, which Congress made permanent in December 2015.
In order to take advantage of this tax credit, the student must be enrolled at least half time at an accredited institution, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
“The credit amount is up to $2,500 per eligible student towards the cost of tuition, fees and course materials,” she said. “It does not cover room and board.”
D’Agostini said your child’s college should supply you with a form 1098-T, which details your expenses.
To qualify for this credit, there are income limits.
Your modified adjusted gross income needs to be $90,000 or less for a single, or less than $180,000 for those married filing jointly, D’Agostini said.
If you earn more, you can’t claim any of the credit.
The tax credit is 100 percent of the first $2,000, plus 25 percent of the next $2,000, and it can only be claimed for fours years for the same student, D’Agostini said.
Then there’s the Lifetime Learning Credit, but this can’t be claimed in the same calendar year for the same student as the American Opportunity Tax Credit.
“The Lifetime Learning Credit has no limit on the number of years,” D’Agostini said. “This credit is non-refundable, whereas a portion of the other one could be partially refundable.”
She said the Lifetime Learning Credit is for up to $2,000 towards the cost of tuition, fees and course materials. There are phase-outs for these, too.
There’s also a tuition and fee deduction worth looking at.
You may also be able to deduct qualified student interest.
“You can deduct the lesser of $2,500 or the amount of interest that you paid,” D’Agostini said. “You can get this even if you don’t itemize deductions.”
And again, there are phase-outs based on your modified adjusted gross income.
Another way to save on taxes is to save in a 529 plan, which allows you to invest for college and your earnings and distributions for eligible expenses come out income tax free, D’Agostini said.
“Two–thirds of states will give their residents a tax break or deduction, but you would need to utilize the 529 Plan specific to the state where you live,” she said. “New Jersey is not one of those states.”
Bonds may be another tax savings opportunity.
If you cash in I bonds or EE bonds that were issued after 1989, you may not have to pay taxes on the interest earned if the funds are applied to qualified expenses, which are tuition and required fees but not room and board, D’Agostini said.
“The bond owner must be at least 24 when the bond was issued and again, there is a phase-out at certain income levels,” she said.
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This post was first published in March 2017.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.