Education Strategies

There are several tax-advantaged strategies for those saving for a child's education, such as 529 plans, Coverdell Education Savings Accounts (ESAs), and education tax credits. Navigating the different options and the temporary nature of some opportunities, however, can be challenging. Give us a call to discuss tax breaks for education.

Education Tax Credits

If you are currently paying higher education expenses, two Federal tax credits may help lessen your tax bill: the Hope Scholarship Credit (American Opportunity Tax Credit) and the Lifetime Learning Credit.

The Hope Scholarship Credit is worth $2,500 for 2017. The credit is available for all four years of college and can be used to cover the cost of course materials. Income phase-out levels for the credit are $160,000 of modified AGI for joint filers and $80,000 of AGI for single filers in 2017. In addition, 40% of the credit is refundable, which could enable lower-income taxpayers to get money back from the IRS.

The Lifetime Learning Credit, which applies to undergraduate study, as well as graduate and professional education pursuits, could be worth up to $2,000. For 2017, eligibility phases out for joint filers with modified AGI of $112,000 ($56,000 for single filers). If a student qualifies for both credits in the same year, you may claim either credit but not both.

If you cannot claim either credit because your income is too high, your child can take the full credit if he or she has sufficient taxable income. However, you will not be able to claim a dependency exemption for the child. Your savings, therefore, will be the amount of the credit less the tax benefit of the lost dependency exemption. But, be aware that, based on your income, the exemption may be reduced.

alt

Consider whether it might be more beneficial for your child to file his or her own tax return and claim an education tax credit. We can help you calculate which option is best for your family.

alt

The Achieving a Better Life Experience (ABLE) Act, creates tax-favored savings accounts for individuals with disabilities for tax years after 2014 and offers tax-free treatment of an ABLE account (income grows tax-free and withdrawals for qualified disability expenses are tax-free). One qualified disability expense is education including tuition, books, supplies, and educational materials for preschool thru post-secondary education.

The Protecting Americans from Tax Hikes Act of 2015 (PATH) signed into law on December 18, 2015, includes a few modifications: an expansion of how qualified distributions from section 529 plans can be used, and the elimination of the in-state-plan requirement for the coming new 529-ABLE plans for disabled beneficiaries.