Your Money: Tax dollars for education
April 15, 2014
Sounds simple, you pay for college and then you get some extra money back on your tax return. But, with three distinct options for how to claim your education expenses, it gets confusing quickly. A recent study by the Treasury Department showed that over $20 billion in education-related tax savings were reaped in 2011, but $3.2 billion of that was erroneous, and half of the returns with errors came from professional tax preparers. What makes this number scarier is that even more returns filed were technically correct, but the taxpayer didn't maximize their credits for education.
So, how do you know what's best for your student? The first step is to prepare your return with all information except your education. Then, I recommend plugging in your expenses using each of the methods available, the Tuition and Fees Deduction, the Lifetime Learning Credit, and the American Opportunity Tax Credit. If you are using a tax preparer, ask them to do the same, don't just assume they know which one works best, as it may change from year to year.
Knowing a bit about each option will help you narrow down your choice quickly. The biggest difference is between a deduction and a credit. A deduction is a subtraction from your adjusted gross income, so it lowers your taxable income and you save whatever your tax rate is. If your effective tax rate is 15 percent and you take the full $4,000 deduction, you would save $600 in taxes. The Tuition and Fees Deduction is the only option for a deduction, and you can subtract the full $4,000 as long as you have that much in eligible expenses.
Far more beneficial than the deduction option are the two credits. The Lifetime Learning Credit allows you to take a credit, which means that you can reduce your tax bill itself, not just your taxable income. For the Lifetime Learning Credit, this is up to 20 percent of qualified expenses up to $10,000, or a $2,000 net effect. If your tax bill isn't at least $2,000, though, you don't get additional money back, so if your tax bill is low, you won't benefit in full. And, if you have multiple students, you don't get any additional credits beyond the $2,000.
The American Opportunity Tax Credit is by far the most significant, allowing a credit of 100 percent of the first $2,000 of qualified expenses, and another 25 percent of the next $2,000 in expenses. This results in a maximum credit of $2,500, but $1,000 of that may be refundable, which means you get money back even if you didn't owe that much on your taxes, it's not necessarily a reduction of your tax bill. The other benefit for this credit is that it can be used for multiple students on the same return, it's not limited to one per return.
No doubt, this is just the tip of the iceberg. There are income limits, dependent qualifications, different types of qualified expenses and other limitations, so it's important to dig in and learn everything you can before making your decision. With a potential savings ranging from $600 to $2,500, it's worth taking the time to make the right choice.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
Recommended Stories For You
Trending In: Local
- Dillon town council sends hotel development back to drawing board
- Summit High School 2016-17 first semester gold-level honor roll
- Mrs. Summit County works with pageant to collect teddy bears for children
- Frisco BBQ Challenge hosting essay contest for Father’s Day weekend getaway
- Rocky Mountain resorts report lodging revenue up by 7.2 percent
- Breckenridge businesses facing discipline over December drug bust
- Storm set to break Summit County’s dry spell with as many as 7 inches predicted Thursday
- Mysterious Aspen ski rental contract may relate to Trumps
- Summit County works to dispel rumors in the immigrant community
- Summit County daycare teachers to get free health care access