If you think you may be eligible for education tax credits this year, you should keep records of the qualified education expenses paid during the year. Keep in mind, qualified education expenses paid on behalf of a student by someone other than the student are treated as paid by the student or by the parent if the student is a dependent, therefore you should include any expenses paid for by another person such as a grandparent or other relative. Qualified education expenses include: tuition and fees required for the student's enrollment or attendance at an eligible educational institution; course-related books, supplies and equipment needed for a course of study (for Lifetime Learning Credit these expenses must be required to be paid to the institution as a condition of enrollment or attendance). Student activity fees, athletic fees or other expenses unrelated to the academic course of instruction may be deductible only if paid to the institution as a condition of enrollment or attendance. Personal expenses such as room and board, insurance, medical expenses, transportation, sports and hobbies are not deductible. You will receive a Form 1098-T from your educational institution reporting to you either payments received or amounts billed during the year. You must report actual amounts paid during the year on your tax return. If that amount differs from what is reported on your 1098-T, please be sure to note that when submitting your tax documents to our office.
If you think you may qualify for college aid you should consider taking the following actions:
- Accelerate or defer employer bonuses so you do not receive it in the base year (the year before the student enters college).
- Avoid large capital gains in the base year.
- Pay off consumer debt. Consumer debt does not reduce your net worth for financial aid purposes. Therefore, if you have cash of $5,000 in the bank and consumer debt of $3,000, they will consider you to have $5,000 of net worth instead of $2,000. Everything you can do to reduce your earnings or make your net worth appear lower increases your chances of obtaining financial aid.
Section 529 plans allow you to save tax on the earnings on funds you set aside for education purposes. A specific beneficiary is designated for each 529 account. When funds are withdrawn for that beneficiary, the distributions are not taxed as long as they are used for qualifying education costs such as tuition, books, supplies and equipment, and also room and board. If funds are withdrawn for other purposes, the earnings are taxed and a 10% penalty is imposed, unless the beneficiary had received a scholarship. Contributions to 529 Plans are subject to gift tax filing requirements. You can accelerate 5 years' worth of gifts when giving to a 529 plan. Therefore, each individual (spouse, grandparent, etc.) can give up to 5 times the annual gift tax exclusion to each student/beneficiary without gift tax consequences. The annual gift tax exclusion amount changes annually, so to find this year’s exclusion amount, please see the list provided on our website under Resources titled “Annual Updated Tax Numbers” for this and other limits, thresholds, and rates that change annually. Consider contacting your financial advisor for assistance in selecting and investing in a Section 529 plan that is right for you.
If your child will attend a public college in North Carolina, visit The College Foundation of North Carolina's website at www.cfnc.org.
There, you will find:
- A career center to explore different careers that might suit your child's abilities, interests, etc.
- A student planner to plan courses so your child will meet the entrance requirements.
- A comparative view of colleges with links to every college in the State.
- Online applications for admission, financial aid and more.
Two education credits are available to help cover the costs of higher education. However, the ability to claim these incentives may be reduced or eliminated depending on your filing status and Adjusted Gross Income. The "American Opportunity Tax Credit" allows taxpayers to claim 100% of the first $2,000 in qualified tuition and educational expenses plus 25% of the next $2,000 for a maximum credit of $2,500. This credit can be taken for each eligible student you have, so for example, if a taxpayer has three children in college at one time, they may be eligible for up to $7,500 in tax credits. Up to 40% of this credit may be refundable even if you have no tax liability. This credit is available through 2017. The "Lifetime Learning Credit" can provide a tax savings of up to $2,000 per return. The maximum credit is $2,000 per year regardless of the number of students in college. These credits are for specific qualified education expenses paid for during the tax year. Please see Qualified Education Expenses topic below for more details.