• Home
  • Table of Contents
  • Tax Tips
  • Credits
  • Deductions
  • Refunds
  • State Taxes
  • Politics/Laws
  • Tax Terms
  • Archives

Don't Mess With Taxes

Translating taxes into money-saving English

Home Table of Contents Tax Tips Credits Deductions Refunds State Taxes Politics/Laws Tax Terms Archives

Tax breaks can help pay many college costs

Originally posted as blog item on March 13, 2019. That post was updated Sept. 4, 2020.

College-daughter hugging mome before heading to university

College and its ever-increasing costs certainly have gotten a lot of attention.

There's the group of Democrats seeking their party's 2020 presidential nomination. Obviously spurred by the enthusiastic supporters of Independent-turned-temporary-Democrat Sen. Bernie Sanders and his promise of free college, many other White House wannabes also are talking up educational assistance.

Then there's this week's Operation Varsity Blues. You might not have caught the name, but let me drop two others to spur recognition: Felicity Huffman and Lori Loughlin.

Yeah, that's the name federal investigators gave to their take down of a far-reaching college admissions scheme.

Wealthy parents, elite school admissions issues: Actors Huffman and Loughlin are among the wealthy parents — and latest reports say many, many more are involved than the 50 cited in the original indictment — accused of being part of a conspiracy to get their children into elite schools by, among other things, allegedly bribing university personnel, contributing to a fraudulent scholastic charity and claiming tax deductions for the donations and faking student athlete resumes.

Those of us who, along with our families, worked hard and scraped together all the cash we could through various legitimate means to go to college can take some schadenfreude solace in these wealthy alleged college entry cheaters being caught.

But we can't gloat for long.

Well, I can. I'm done with my schooling.

But if you or your parents are paying for upcoming higher education semesters, you need to start looking at legal ways to make your college days possible. Uncle Sam can help.

There are many educational tax incentives, from tax credits and deductions to tax-favored savings options and scholarships and even employer help, that are available to students and their families.

It takes a little homework to find the educational tax benefits that meet your particular needs, but it could be worth it. Here's an overview.

Tax credits: Tax credits are the best tax break. Rather than simply reduce the amount of your income that's subject to tax, credits cut any tax you owe dollar-for-dollar.

There are two educational tax credits, the American Opportunity Credit and the Lifetime Learning Credit.

The American Opportunity tax credit provides up to $2,500 for each eligible student. It covers an eligible student's qualified education expenses paid during the student's first four years of higher education.

Like most tax breaks, it takes some calculating to get the most from the American Opportunity credit. You get a credit of 100 percent of the first $2,000 of qualified education expenses per student and then 25 percent of the next $2,000 in college costs.

But one of the best things about the American Opportunity credit is that it is refundable. That means, as that descriptor indicates, if the credit reduces your tax liability to zero, the excess is refunded to you. In the case of the American Opportunity credit, you can collect 40 percent of any remaining credit amount (up to $1,000) as a tax refund.

There are, of course, requirements that must be met, such as being a qualified student. Those specifics can be found at the Internal Revenue Service's special Web page on the American Opportunity tax credit.

Those details also include the income limits on just who can claim the full credit. To get the most benefit, your modified adjusted gross income (MAGI) must be less than $80,000 if you're a single filer or double that for married couples filing a joint return. taxpayers ($160,000 married filing jointly). And if your MAGI is more than $90,000 as a single taxpayer or $180,000 and you're married filing jointly, you can't claim the American Opportunity tax credit.

The Lifetime Learning Credit is for older students. It provides a maximum annual amount up to $2,000 per tax return. That amount is based on 20 percent of the first $10,000 of qualifying educational expenses.

The good thing about the Lifetime Learning Credit is that students who go beyond four years of studies and even workers taking career-improving classes can claim it. The bad news is that it is not refundable. If you have any excess Lifetime Learning Credit after it erases your tax bill, you lose that excess credit.

The Lifetime Learning Credit also has MAGI limitations. For the 2018 tax year, this credit phases out your income level is between $57,000 and $67,000; for married filing jointly couples, the limits are between $114,000 and $134,000. Once you make more that those amounts, you can't claim the Lifetime Learning Credit.

Again, you can find specifics on the Lifetime Learning Credit at the IRS' special online page.

Tax deductions: The hubby's perennial tax season chant is "deduct, deduct, deduct." Although not as immediately beneficial as a tax credit, deductions still can help. They help lower your taxable income level, which means you should have a smaller tax bill, possibly even falling into a lower tax bracket.

There are two current education tax deductions. Both are what are known as above-the-line deductions, meaning you don't have to itemize to claim them.

Both are available for qualifying undergraduate and graduate student costs. However, one of those educational deductions is on hold.

First, let's look at the deduction that's available now, the student loan interest deduction.

Many students and their families find that they need outside money to cover at least some college costs. When you take out a student loan, up to $2,500 of interest paid during the year can be claimed.

The student loan interest deduction also is phased out as student/family income increases. The limiting starts when MAGI is between $65,000 and $80,000 for single filers and between $135,000 and $165,000 for married filing jointly. And again, once you make more that those amounts, you can't deduct the interest.


Home loans to cover college now nixed
A Tax Cuts and Jobs Act (TCJA) provision did away with a popular college loan option.
Previously, homeowners were able to take out a home equity loan,
use that money to cover college costs and then deduct the loan's interest.
No longer.
Now interest is deductible only when the home equity funds
are used in connection with the property (e.g., adding a residential addition
or making needed repairs) securing the loan. 


The other above-the-line tax education-related tax deduction is the one for qualifying college tuition and fees. This provides up to $4,000 for just what the name says.

The tuition and fees deduction, however, also is part of a group of temporary tax breaks known as extenders which must be periodically renewed by Congress. That hasn't happened yet for the collection that expired at the end of tax years 2017 and 2018.

Conventional wisdom is that the extenders will, for the most part, be renewed. The timing of that legislative action, though, is unclear. It might or might not happen by this year's April filing deadline(s).

Education savings options: Americans aren't very good at saving. However, many parents do try to put away cash for their kids' eventual college costs. There are some tax-favored savings vehicles for these moms and dads (and grandparents and aunts and uncles, too).

The most popular are 529 plans, which get their name from the federal tax code section under which they were created. A 529 plan can be established for a youngster, known as the account beneficiary, and money contributed to it grows tax-free.

When the young person heads off to college, the 529 money can be used, again tax-free, to pay for qualifying education expenses, such as tuition, fees, books, supplies, equipment and room and board at eligible institutions.


Some pre-college costs count, too
Another TCJA change allows for up to $10,000 per student per year of 529 plan money
to be used to pay certain primary or secondary (Kindergarten through grade 12) costs
at public, private, and religious schools. 


While 529 plans were authorized by federal legislation, the plans themselves are administered by states. All 50 offer some type of 529 and you can invest in a plan established in another state if it better fits your family and educational needs.

Anyone can contribute to a student's 529 without worrying about income limits. But these donors don't get any tax benefit for their gifts. And speaking of gifts, a 529 plan is a good destination for the $15,000 annual gift exclusion amount.

And while there are no annual contribution limits for 529 plans, there are lifetime contribution limits. These vary by plan, with most recent limits ranging from ranging from $235,000 to $529,000.  

But federal law does say that 529 plan balances cannot exceed the expected cost of the beneficiary's qualified higher education expenses. Basically, this is what the states administering the plans believe will be the full cost of attending an expensive school and graduate school, including textbooks and room and board.

My earlier post 529 college saving plan perks and pitfalls has more on these plans.

Coverdell Education Savings Accounts also offer tax benefits when it comes to school costs, both higher education and pre-college expenses. The amount that can be contributed to a Coverdell, however, is much lower — at most $2,000 a year — and income limits — $110,000 ($220,000 for married filing jointly — apply to contributors.

Additional tax-free educational assistance: The tax code also allows for other, tax-free ways to cover many educational costs. This generally involves getting individuals income that is excluded from taxation.

A common way this is accomplished is by getting help from your boss. Such employer-provided educational assistance is offered by many companies to help their workers. As long as these programs are set up under IRS rules, you could get up to $5,250 for school costs without that money counting as taxable income to you.

Other companies also are looking at workplace benefits that help employees pay off their student debt. Last August, the IRS issued a private letter ruling that allowed a company to tie its workplace 401(k) contributions to workers' student loan repayments.

Some companies had established similar student loan workplace assistance arrangements even before the IRS announced its tax-favored position on that particular case and more could follow.

Then there are scholarships. We're talking actual, student qualifying assistance, not the kind of paid-for but fake assistance for faux athletes alleged in the Varsity Blues case.

As long as you meet IRS guidelines, the scholarship amount is tax-free. This generally means a student must be a candidate for a degree at an eligible educational institution and use the scholarship to pay qualified education expenses (e.g., tuition, enrollment fees, books, supplies and equipment required for the courses).


No double dipping
Determining which tax-related assistance works best
for you or your child is not an easy assignment.
Further complicating the decision is noting that you can't double dip.
That means you can't take more than one education benefit
for the same student and the same expenses.
For example, you can't take the American Opportunity
and Lifetime Learning credits for the same student in the same tax year.
And if you receive tax-free educational assistance,
you must subtract that amount from your qualified education expenses. 


Support other students:
Finally, speaking of scholarships, if you have some extra cash and want to help others get a quality education, you can create a scholarship at your alma mater.

Not to toot our own horns, but that's what the hubby and I did for students who need some help to begin and/or continue their journalism studies at Texas Tech University. We're proud of our school and how well it prepared us for our post-graduation professional lives. We want others to have similar opportunities.

Plus, it was fun and we met there, although we didn't start dating until later. But I (happily) digress.

Your school's financial services office, like the folks at TTU and its College of Media & Communication, will help you establish a scholarship program that meets your goals, student needs and Internal Revenue Service guidelines.

And unlike the alleged fraudulent contributions that some charged in Operation Varsity Blues are accused of making, the donations you make to a legitimate scholarship fund — either one you create or an existing one — truly are tax deductible.

You also might find these items of interest:

  • Don't miss your state's 529 plan tax break deadline
  • 8 ways the new tax law does — and doesn't — affect paying school costs
  • Make paying for college a family affair, with contributions from parents, kids and Uncle Sam

Advertisements

 

 

Originally posted as blog item on March 13, 2019; that post updated Sept. 4, 2020

Keywords: 529 plans, American Opportunity Tax Credit, college, Coverdell accounts, debt, Felicity Huffman, graduate school, home equity, Lifetime Learning Tax Credit, Lori Loughlin, Operation Varsity Blues, paying for college, scholarship, student loans, tax, tax credit, tax deduction, taxes, university, workplace benefits

Today's Tax Tip

  • Summer's arrival brings sales tax holidays in Florida and Texas — Memorial Day marks the unofficial start of summer. The long weekend also is the start of sales tax holiday season. Texas has three days of no taxes on certain energy- and water-saving products, starting May 27. In Florida, shoppers will start the holiday weekend with sales tax exemptions on hurricane preparedness products, followed season the Sunshine State's wide-ranging no-tax Freedom Summer. (May 27, 2023)

  • Tax Tip; click pencil for all tax tip links

  • The 2023 Tax Tips offer ways to file your annual return, along with post-filing advice, important tax news and, of course, ways to cut your current tax year bill. You'll find the monthly assemblages on their own respective pages: January, February, March, April, May, June, July, August, September, October, November and December. Remember, tax tasks and tips don't stop after you file your annual return!

All About Kay

  • OK, some about Kay
    Open sign
    Kay Bell — Native Texan
    (the blog title totally makes sense now, right?). Professional journalist. Tax geek.
  • LinkTree

My Other Accounts

Advertisements

  • *************

Tick ... Tick ... Tick

  • Tax Season 2023 Continues!

    Tax Day 2023 is finally over … unless you're one of the millions who have more time to file — looking at you taxpayers abroad and those in major disaster areas — or you got an extension to file your 2022 tax year return. That's fine. In fact, the Internal Revenue Service appreciates some of us spreading out our filings, especially when it means we are taking the time to submit a complete and correct return.

    This tax focus shift means the ol' blog will continue to provide filing tips through the Oct. 16 extension deadline. Yep, it's a day later this year, since 10/15 is on Sunday. But I haven't forgotten my organized taxpayer readers, who are looking for ways to reduce their 2023 tax year bills. Yep, that amount already is adding up, but there are moves you can make. The monthly tips and reminders a little further down this column can help everyone, regardless of which tax year now is in your sights.

    Those on extension should also keep a keen eye on the countdown clock below. It will help you track the days tick, tick, ticking off toward that absolutely final fall filing due date. They'll speed by quickly when you're having tax fun, and aren't we always having tax fun?!?
    Note: I'm in the Central Time Zone, so adjust accordingly for where you live.


Time for Tax Tasks


  • monthly tax moves


  • 💐 May 💐 is 💐 here!!! 💐

    Those exclamation marks and emoji bouquets are sincere and deserved. I don't know about you, but I'm more than ready for May flowers.
    Plus, you've got to love a month that starts with a celebration.

    May Pole Dance via GIPHY


    After the May Day dances are done, the commemorative days just keep coming. There are well-known ones, like Cinco de Mayo, Mother's Day, and Memorial Day, as well as some more obscure ones, like Pick Strawberries Day, Be Millionaire Day (if only!), and my favorite, Eat What You Want Day.

    But even with all these (and more!) celebrations, there's still time to make some money-saving May tax moves. Let's get to it!

    May 1: While May Day isn't a big holiday in the United States, globally the first day of May is a time for celebrating workers' contributions. But that can apply here, too, in connection with some employment-related tax tasks. If you got a big refund or owed more tax than you expected when you filed (or got an extension) last month, today's the perfect time to do adjust your paycheck withholding.

    May 5: ¡Feliz Cinco de Mayo!

    Feliz Cinco de Mayo

    Fiestas are always en vogue in Tejas, but the epitome of them is this Mexican holiday. No, it is NOT Mexican Independence Day, and May 5 tends to spur more festivities here north of the border, especially when it comes to imbibing margaritas. With every Cinco toast, remember that the cost of state and federal alcohol taxes are included in the mixing. Your state tax collector also will raise a glass to your fiscal contribution, since sin taxes usually are a revenue bright spot for many states.

    May 10: Do you work as a server at a restaurant or at any other establishment where gratuities from customers are part of your compensation? I hope you got lots of financial thanks for doing your job well, especially from those Cinco celebrants. But don't forget that those tips are taxable income.

    restaurant check tip iStock
    Whether you're dining in or, still COVID leery and getting food delivered to your home, if a tip isn't included on your restaurant or delivery bill, click the image above to calculate how much to tip the person who brought it to you.

    And you, as the server or delivery person, must account for those tips. If you got at least $20 in gratuities in April, you must report the amount by today by using Form 4070 to let your employer the total of the tips you took in last month.

    May 14: Happy Mother's Day!

    Happy Mother's Day

    If you're just this year making up for pandemic paused family visits (side note: May 18 is Visit Your Relatives Day), give your mom a longer hug on her special day. Love, flowers, and the best of health and happiness to every mother, from the new ones just discovering the joys, tax and otherwise, of new parenthood to those gracefully maneuvering their Golden Years while getting some tax-advantaged help from their families.

    May 22: Just because you got an extension to file your 2022 tax return doesn't mean you have to wait until the Oct. 16 deadline to finish it. And you might be able to complete all those forms at no cost. Free File, the online preparation and electronic filing web page for eligible taxpayers created by the IRS' partnership with the Free File Alliance is still operational for, as its name says, free.

    This year, the income threshold is adjusted gross income (AGI) of $73,000 or less, regardless of your filing status. You should be able to find a software that works for you from the seven tax prep companies that are participating.

    IRS Free File; click image for details


    May 26: If you're heading out early today to further extend the already long Memorial Day weekend, be sure to plan for added costs, like the price of getting to your holiday destination. Most travelers this weekend that marks the unofficial start of summer will hit the highways, so even though gasoline prices are at the exorbitant levels they were this time last year, pump prices still will take a bite of travel budgets. Maybe that will get you to look more closely at getting an electric vehicle (EV) before your next road trip. Check out the tax rules to see if your new EV comes with a $7,500 tax credit

    May 29: This Memorial Day as you honor the military personnel who made the ultimate sacrifice, don't forget about their families. There are some tax considerations offered survivors of lost soldiers, sailors, and air crew.

    Small Business Tax Calendar: Important filing, deposit and record keeping dates throughout the year that your company needs to know. You can get more tax calendar information at the IRS' online calendar page and view the full year's important business and individual tax dates in IRS Pub. 509.

State Tax Help

  • Don't forget your state taxes!
    Forty-three states and D.C. collect personal income taxes. But even if you live in of the seven states without an income levy, you still face other state (and local) taxes.

    State Tax Departments provides links to your state's Web page. The companion page, Tax Tidbits, is the compilation of blurbs about each state's tax laws. And for more state tax news, check out all our state tax bloggings.

Tax Forms

  • Tax Forms
    Thanks to our increased use of tax preparers and computer software, many of us don't see our tax forms until we sign and file them. But knowing what's on these documents, either in paper or digital form, and why the IRS wants it is key to understanding our tax system. And knowledge definitely is power, especially when it comes to tax savings. Find this valuable information in the ol' blog's special Tax Forms 2023 page.

What are you looking for?

  • Looking for something in particular? Start with the Table of Contents.
    Or check out the Archives, where you can review posts by month and category. Or enter specific keywords in the box below to search
    Don't Mess With Taxes.

Search

Subscribe:
E-mail, RSS or both!

  • Enter your Email


    Powered by FeedBlitz
  • RSS

Privacy Policy

  • Wondering what happens to your information once you subscribe? Don't worry. Don't Mess With Taxes respects your wish not to be a mere data source. Check the ol' blog's privacy policy at the Table of Contents page, as well as on the separate Privacy Policy page.

Sponsored Products

Affiliate Books

  • The Truth
    About Paying Fewer Taxes
  • Are you a tax geek? Got tax geek friends? Do you or they just want to make sure you don't overpay the IRS? Then my book, "The Truth About Paying Fewer Taxes," is for all y'all.

    Look for it on bookstore shelves
    or order a copy (or two!) from
    Amazon or Barnes & Noble.

  • TruthAboutPayingFewerTaxes
  • Find out more about my book and excerpted chapters at the FT Press
    Truth About Paying
    Fewer Taxes
    Web page
    .

  • You can read more
    of Kay's tax insights in ...


  • Kay Bell helps you build
    a solid tax foundation in
    "Personal Finance: An Encyclopedia
    of Modern Money Management"




    Kay Bell breaks down taxes and
    estate planning for millennials in
    "Future Millionaires' Guidebook"



    A collection of Kay Bell stories
    is included in
    "The Gambler's Guide to Taxes:
    How to Keep More
    of What You Win"




  • Tax Reading Room

    You also might enjoy these other tax tips from some of my tax-writing colleagues:

  • JK Lasser 2023 Taxes
    JK Lasser 2023 taxes

  • Dealing With The IRS
    Dealing With the IRS

  • JK Lassers 1001 Deductions
    JK Lasser 1001 Deductions
  • ~~~~~~~
    Don't Mess With Taxes
    is an Amazon Affiliate.
    If you click on the product links above and/or buy the items,
    I will be compensated.

0, 1, 2, 3, 4, 5, 6, 7, 8, 9 ...

  • Numbers
    Taxes are all about the numbers.
    Check out these (mostly) weekly
    By the Numbers figures.

Kudos Et Cetera

  • Association for Women Clarion Award Winner
    National Association
    for Women in Communications

    Winner, Best Personal Blog
    2012, 2014 & 2017

  • Plutus Award Winner
    Plutus Financial Bloggers Awards
    Celebrating the Best
    in Personal Finance

    Winner, Best Tax Blog
    2011 and 2013
    Lifetime Achievement Nominee 2020


I gotta tell ya ...

  • AKA Disclaimer:
    I am a professional journalist who has been covering tax issues since 1999.
    I am not a professional tax preparer.
    The content on Don't Mess With Taxes is my personal opinion based on my study and understanding of tax laws, policies and regulations. It is provided for your private, noncommercial, educational and informational purposes only. It is not a recommendation of any specific tax action(s) you should or should not take. Similarly, mentions of products or services are not endorsements. In other words, my ramblings on the ol' blog are free advice and you know what they say about getting what you pay for. That's why when it comes to filing your taxes, I urge you to get additional, professional, paid-for guidance from an accountant, Enrolled Agent or other qualified tax preparer who is familiar with your individual tax circumstances.

©©©©© & ®®®®®

  • Don't Mess With Taxes®
    is a registered trademark
    of S. Kay Bell.

    All content on this site is
    © 2005-2023 S. Kay Bell
    dba Write Here, a division of
    SKB Editorial Services, LLC

  • And a bit of housekeeping.
  • Note 1: Some of the links on this site
    are affiliate links. That means that
    if you click through from
    a Don't Mess With Taxes link
    and then buy the product,
    I receive a commission.

    Note 2: Links to outside content
    might become inactive due to changes
    at the copy's originating website.
    If you discover dead links, please e-mail me the details. Thanks.

    Note 3: The banner art for the ol' blog
    is courtesy Pictures of Money
    via Flickr Creative Commons.
Blog powered by Typepad
Member since 11/2005

COVID-19 & Taxes

  • COVID-19
    Coronavirus has wreaked havoc
    on the 2020 and 2021 tax seasons.
    These three Coronavirus (COVID-19) and Taxes pages have details:
    March-July 2020,
    August-December 2020,
    January-December 2021, and
    January-December 2022
    You can find medical coronavirus resource links in the next section.

COVID-19 Resources

  • COVID-19
    Need help finding a coronavirus vaccine in the United States?
    Call 1-800-232-0233
    or TTY 1-888-720-7489.
    More information and resources at:
    CDC Vaccines
    CDC Booster Shots
    HHS Combat COVID
    USA.Gov COVID Info

May 2023

Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Tell it to the Hill

  • DMWT Politics Posts
  • While it's easy to rail at the IRS, for the most part we can thank — or blame — our tax laws on Congress and the White House. So if you have an issue with tax legislation or want a tax bill passed, you need to let your federal legislators and the White House occupant know of your concerns. You can find out who in Washington, D.C., to contact (and how), as well as get information on your local lawmakers for matters, tax or otherwise, closer to home, at USA Gov.

..................................................



  • .................................................................
  • Don't Mess With Taxes •
  • Powered by Typepad
Top