By Brian Klintworth, CPA, MT
Maximizing Education Credits for College-Aged Students
Another new year is already upon us, which means it is now time to start thinking about filing your taxes again. While that thought is enough to excite most accountants and CPAs, it can be more of a confusing time for taxpayers as they try and navigate the nuances of the tax law. One of the more confusing topics is based around education credits for your college-aged children. The whole process can be confusing for both students and their parents—HBE even has a whole Financial Literacy Toolkit that we share with students through various organizations in the community to help them prepare for a wide variety of financial topics. One of the main areas that we focus on is college planning, and we dig into some of the best planning techniques and point out some common pitfalls to help students successfully plan for their post-secondary education. As accountants, it also makes sense for us to also look at the tax credits that are available to help offset college expenses.
There are some great education credits out there for college students, but the mechanics of them can be a bit confusing. The best credit is often the American Opportunity Tax Credit (AOTC), which can be worth up to $2,500 on $4,000 of qualified education expenses. The AOTC can be claimed up to four years in total for a student. Note that qualified education expenses would include items like tuition, books, and fees, but would not include housing or meal plan-related expenses. One common question we receive regarding education credits is who can claim them. The taxpayer who claims the student (generally this would either be the student’s parents, guardians, or the student themselves) would be the one who could claim any credit, regardless of who actually pays the expenses. If the parents are claiming their student, but their income is too high to claim any tax credits for education, it may be worth reviewing the dependency tests to see if the student contributes enough to their financial situation that they can claim themselves. If you are unsure of how the dependency tests work, feel free to talk to your accountant. If the AOTC either does not make sense or cannot be claimed, it may also be worthwhile to look at the Lifetime Learning Credit.
Scholarships are great for students, as they reduce out-of-pocket college expenses . But, sometimes, scholarships can have an impact on the student’s taxable income, which must be considered. First, scholarships that cover room and board and other housing-related expenses are actually income to the student, as those are not qualified education expenses. If the amount (combined with any other income) is high enough, the student may be required to file a tax return. In addition, there may be times where a student receives so many scholarships that they have no qualified education expenses for any tax credits. However, in that case, a student may elect to include more of their scholarships into their own income to increase deductible education expenses and enable more education credits to be taken. With the new standard deduction of $12,200, it is possible for some students to pick up scholarship income and pay no tax on those amounts. For example, a student with $4,000 of wages and $3,000 of housing related-scholarships could recognize $4,000 of additional scholarship income to maximize their education credits and still not have to file a tax return (taxable income of $11,000 would be below the $12,200 standard deduction). We encourage you to review your personal situation with an accountant to see what makes the most sense.
Understanding how education credits work and how they flow between students and their parents or guardians can be a bit of a confusing process. If you have a student in college, graduate school, or even taking college-level courses in high school, please be sure that you bring this up and discuss it with your accountant. They will help take a look at your situation to ensure that you are maximizing the education credits that are allowable to you. Their goal is always to maximize your tax benefits to get you into the best situation possible.