Educational & Tax Benefits

The federal government grants to all of us financial incentives to continue one’s education. Even if you don’t itemize, these incentives may be available. Education expenditures can be taken either as a credit or a deduction.

Tax Credits:
Tax credits allow a dollar for dollar benefit, unlike deductions. As such, they have more value than deductions and are very attractive to tax payers who might not otherwise qualify for deductions, such as mortgage interest, property taxes, medical expenses, etc. Essentially, there are two types of education tax credits: 1) the Hope Credit and 2) the Lifetime Credit.

The Hope Credit is only available for the first two years of post secondary education. The Lifetime Credit is available every year, graduate or under graduate, subject to income limitations.

Typically, a parent’s education expenditures are not eligible for allowable credits because their income is too high. In most cases the solution is to give up the dependency exemption, allowing the dependent to take the credit.

Tax Deductions:
Also, there are two types of education deductions: 1) Non-business education and 2) Employment related.

The first type of deduction is non-business or personal. Here all qualified tuition and fees are deductible up to a maximum of $4,000 and phase out for a single person at $65,000 AGI; a married couple phases out at $130,000 AGI. A person claimed as another’s dependent is not eligible for this deduction. So, the person claiming the dependency exemption must be considered – the parent or the child.

The second type of deduction is an employment related expenditure. For example, you are a real estate lawyer and take a course on the changes in real estate laws. Or,  you’re a mechanic and your employer requires you to take a course on auto emissions. Both qualify because they maintain an existing skill or is a job requirement. However, there are some education circumstances which do not qualify. A Facts and Circumstance Test determines deductibility and requires a professional CPA to determine whether or not one is entitled to the deduction.

Furthermore, even if you are entitled to the deduction, your deductions may not total enough to gain any benefit. Why? Because only amounts over 2% of AGI are deductible.

There is no choice of how the deductions are taken. Personal type expenditures are used to calculate adjusted gross income. Employment type expenditures are used to calculate taxable income.

One has either two types of credits or two types of deductions to choose from. First, decide whether a credit or deduction is appropriate to your situation. If a deduction, determine what type of expenditure it is – personal or business. Second, examine your income level to determine if the credit or deduction will be of limited tax benefit. It may mean a greater tax savings to give your dependent the education benefit.

Many of these areas are too complex to discuss in this forum, but I’d be happy to discuss them or any tax problems and their solutions with you.

Other Education Savings:
Education IRA’s and section 529 plans are examples of this category. My office will help you decide if this item is beneficial for you.

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