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Wednesday’s Parent: Tax Filing Tips for Parents

 

A few months ago I wrote an article for University Parent to provide parents with tax filing tips. Here’s a repost of that article:

tax filing tipsThere’s no doubt — higher education is expensive. For the average family, like mine, paying for college can cause sleepless nights, especially if you haven’t planned and saved. With college costs rising every year, parents are searching for ways to offset some of the expenses.

Tax savings are one way to do this, and the federal government does offer some tax relief for parents. But understanding federal “tax speak” and applying it to your family can be confusing. Here are a few simple tax tips that should help when filing your federal return.

How are college savings plans such as 529s taxed?

If funds from the 529s or other college savings plans are withdrawn to pay for qualified education expenses, they are not taxed. Any money withdrawn beyond those qualified expenses will be subject to tax.

Are 529s in the student’s name provided by grandparents counted as untaxed income? Jodi Okun, of College Financial Aid Advisors, explains that any funds distributed from these plans are considered untaxed income and should be reported on the student’s income tax return if he is required to file.

Are financial aid grants and scholarships considered income? 

According to Ms. Okun, if the scholarship is made out to the student, it is considered the student’s income. Any money the student receives the student will have to report, but only when it exceeds education expenses. If your student receives scholarships and grants that exceed the costs of tuition, fees, books, and required course-related equipment and supplies, he is required to report the excess funds as taxable income. Funds used to pay room and board, travel, and non-required equipment and supplies are also taxable. Scholarship and grant recipients should retain fee statements, textbook receipts, and similar records to support their calculations of the non-taxable and taxable portions of their awards.

For instance, if your student gets several different scholarships that cover all of his qualifying expenses and has some money left over after paying qualified education expenses, that extra amount is taxable.

What other tax benefits are available to college parents?

The federal government offers additional tax breaks to families to help reduce the cost of college. You can read a detailed explanation of the benefits on the IRS website’s Tax Benefits for Education Information Center. Basically there are four options:

  • The American Opportunity Act — Up to $2,500 per student
  • The Lifetime Learning Credit — Credit of 20% of the first $10,000 of qualified tuition expenses or a maximum of $2,000 per taxpayer
  • Student Loan Interest Deduction — Taken as an adjustment to your income via a deduction
  • Tuition and Fees Deduction  Up to $4,000 based on your income

Ms. Okun points to a helpful Interactive Tax Assistant tool on the IRS website that parents and students can use to determine if you are eligible for higher education tax deductions or credit.

The tool walks you through a series of easy-to-answer questions, producing the information needed to file the credits you are eligible to receive. The exercise takes about 10 minutes. Time well spent!

What is the tuition and fees deduction?

Originally set to expire last year, this deduction has been extended again through 2014. You may be able to deduct qualified education expenses paid during the year and there is no limit on the number of years the deduction can be taken. The qualified expenses must be for higher education. The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.

According to the IRS, you can claim the tuition and fees deduction if all three of the following requirements are met:

1. You pay qualified higher education expenses.

2. You pay the education expenses for an eligible student.

3. The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

If you do not qualify for the Lifetime Learning Credit or the Opportunity Credit, you may be eligible for this deduction.

What is a 1098-T and where will it be mailed?

Colleges are required to provide students with a 1098-T tax information form. This form reports amounts billed to you for qualified tuition and educational expenses, as well as other related information. If your student is a dependent, you will need this form when you file your taxes and claim education credits or the tuition-and-fees tax deduction. Some colleges mail the 1098-T to the student’s home address, but many are now providing the information online through the student portal. Ask the college which method they use, and follow up with your student.

Read Wendy’s post: Beating the Double Whammy of Taxes and College Costs

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Wednesday’s child may be full of woe but Wednesday’s Parent can substitute action for anxiety. Each Wednesday Wendy and I will provide parent tips to get and keep your student on the college track. It’s never too late or too early to start!

The bonus is on the fourth Wednesday of each month when Wendy and I will host Twitter chat #CampusChat at 9pm ET/6pm PT. We will feature an expert on a topic of interest for parents of the college-bound.

Wednesday’s Parent will give twice the info and double the blog posts on critical parenting issues by clicking on the link at the end of the article from parentscountdowntocollegecoach to pocsmom.com and vice versa.

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