The time is here. Summer vacations have wound down, backpacks are filled, and new clothes are purchased in preparation for the start of another school year. Maybe you are preparing your first child for kindergarten or possibly packing up the mini-van for college. Whatever stage you are in, this is surely a busy time of year (and likely expensive too)!
No
surprise to you, education costs continue to increase. A report issued by the
U.S. Department of Education in March of 2013 shows college costs at the public
institutions in the U.S. have increased over 75% in the past ten years. It
doesn’t seem to be slowing anytime soon either. The good news is there is some relief
at tax time.
American Opportunity Tax Credit – This credit is available for
up to $2,500 per eligible student (100% of first $2,000 of expenses and 25% of
next $2,000). It is available for the first four years of post-secondary
education expenses. Forty percent of the credit is refundable, meaning you
would be able to receive up to $1,000 even if you do not owe any federal taxes.
Lifetime Learning Credit – You can claim a tax credit up
to $2,000 for education expenses with this credit (20% of up to $10,000 of
expenses). This credit is available for
an unlimited number of years, but is non-refundable; therefore you must owe federal
taxes to claim the credit.
The
American Opportunity and Lifetime Learning Credits cannot be combined and they
are subject to income limitations and may be reduced or eliminated depending on
your income. Parents can sometimes shift the credit to the student by not claiming
the student as a dependent, assuming the other requirements for doing so are
met.
Student Loan Interest Deduction – Total federal adjusted gross
income can be reduced by up to $2,500 for interest paid on student loans. One
item to keep in mind is the loans must be the legal obligation of the taxpayer
in order to take the deduction.
If you
are an Iowa taxpayer, there are a couple of additional ways to save some taxes:- Iowa Tuition and Textbook Credit – The State of Iowa provides a credit for eligible education expenses for dependent K-12 students. The credit is equal to 25% of qualified expenses up to $1,000 per student (maximum credit of $250/student). It’s worth a look at the listing of eligible expenses, as a little record-keeping could yield you $250/child when you file your taxes.
- Iowa College Savings Plan – A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code. As an Iowa taxpayer, in 2013, you can contribute up to $3,045 per beneficiary per taxpayer and deduct this amount from your Iowa taxable income. For example, married Iowa taxpayers who contribute on behalf of their two children can deduct up to $12,180 (4 x $3,045). Also, grandparents and other family members are eligible to contribute and obtain the tax benefits.
Benjamin
Franklin said, “An investment in knowledge pays the best interest.” Keep that
in mind as the bills begin to roll in. As always, remember to discuss the above
strategies with your CPA to ease the burden (a bit) at tax time.
Kara Hogue, CPA
