All those reports about the high cost of college can seem somewhat abstract until your child is ready to enroll. Then, paying for college becomes personal. If you currently have a college student (or prospective student) in your family, you’ll want to make use of all available tax breaks to help ease the financial burden.
Generally, scholarships are tax free as long as your child is a degree candidate at an accredited institution (certain other requirements apply) and the money is used for tuition, fees, books, supplies, and equipment required for coursework.
In contrast, scholarships your child receives as payment for teaching, research, or other services are taxable. So are scholarships used to cover room and board, travel, or optional equipment-related expenses.
What happens if an award covers both tuition and room and board? In that case, the amount used for tuition will be tax free, while the amount used for room and board will be taxable income.
529 Plan Withdrawals
If savings in a Section 529 qualified tuition program are used to pay college expenses, the withdrawals may be fully or partially tax free. Taxability hinges on the account beneficiary’s “adjusted qualified education expenses” for the year. To arrive at this figure:
- Add together the costs of tuition and related fees, equipment required for enrollment or attendance, room and board (if student carries at least half of a full-time course load), and books and supplies.
- Subtract costs covered by tax-free educational assistance (e.g., scholarships, fellowships, and Pell grants) and costs used to claim the American Opportunity or Lifetime Learning tax credit.
Annual withdrawals are tax free provided they are no more than the student’s adjusted qualified education expenses. Otherwise, the portion of the withdrawn amount attributable to account earnings will be fully or partially taxable.
Two tax credits are available for the payment of qualifying higher education expenses, including tuition and certain related expenses such as books and other required course materials. The most generous of the two, the American Opportunity Tax Credit, is available for any of a student’s first four years of college. The credit can be as much as $2,500 per student. The second credit, called the Lifetime Learning Credit, is available for each year of post-secondary education, including graduate school and eligible job training. The maximum credit is $2,000 per taxpayer return. It’s not possible to claim both credits for the same student’s expenses for the year.
The education credits are reduced or unavailable if adjusted gross income (AGI) exceeds specified limits. Ask us for the 2017 amounts.
Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.
Request your free consultation today by calling Sorenson & Company, CPA at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.