For most of the US, August marks back-to-school and what has come to be a shopping trend much like Black Friday. This year, combined spending on back-to-school is projected to reach almost $75 billion dollars. It's a good thing that many states offer sales-tax free shopping on school supplies and clothing before school starts. But there are more ways to save when it comes to education, including tax return credits, tax return deductions, and several other tax return benefits that can help you minimize your tax due in April. Keep these in mind:
American Opportunity Tax Credit
The American Opportunity Credit allows a taxpayer to claim a credit of up to $2,500 on the first $4,000 of the expenses paid for tuition and all associated fees. In addition, the cost of any books, supplies, and equipment required to attend the school are also allowed. The American Opportunity credit is unique because it allows 40 percent of the credit claimed to be treated as a refundable credit, which can increase your refund. The credit is available on a per student basis if the student is in the first four years of college, enrolled at least half time, and in a degree or certificate program.
Lifetime Learning Credit
The Lifetime Learning Credit allows taxpayers to claim 20 percent of up to $10,000 of the cost of their tuition and fees paid. Most students attending a qualified institution and not claiming the American Opportunity Credit are eligible. There are no limits on the number of courses, enrollment status, or years of prior education to claim the credit. This credit is limited to a total of $2,000 per tax return.
Tuition & Fees Deduction
The Tuition and Fees deduction expired December 31, 2013 and is no longer available for taxpayers who don't qualify for the credits. However, there are some other beneficial tax programs available. Students can cash in qualified savings bonds and exclude the interest from taxes. The bonds must be post 1989 series EE or I bonds and purchased in their name, your name, or your spouse's name. You can withdraw the money from your child's Education Savings Account, or Coverdell, or a 529 plan tax-free. Use the funds you withdraw to pay for all expenses outside of the amounts needed for the appropriate tax credit to maximize your tax savings. If your child has no savings bonds, Educations Saving Account, Coverdell account, or 529 plan and you don't have enough student aid, you can withdraw from your IRA to pay for the remaining tuition and fees expenses. While the distribution will be taxable, if the funds are from a traditional IRA, you will not be subject to the 10 percent additional tax if you are under age 59 1/2.
Scholarships and Fellowships
Scholarships and fellowships are often not taxable if they do not exceed your tuition and fees expenses, not designated or earmarked for room and board, and are not a payment for teaching, research, or other services as a condition for receiving the monies. If you or your student gets any type of scholarship, fellowship or college funding, be sure you understand how it should be reported on your tax return.
And last, but not least, writing a big check to your favorite college or alma mater at the start of school year can be included in your charitable contributions when you file your taxes. Just make sure you keep good documentation regarding the amount donated and keep the cancelled check with your other tax records. Purchasing and donating items to school supplies campaigns for children of struggling families is also a charitable contribution, just keep your receipts. I put mine in a special folder marked "Purchased Contributions" and I highlight the items I donated on the receipt.
There are many other education related items that impact your tax return including ways to save for future expenses while cutting your taxes currently, work /study money received and what that means on a tax return, as well as a host of other issues.
Taxpayers with education costs are sitting on a ton of potential tax benefits - yours for the taking should you know about them. For IRS guidance on the matter, you can get the comprehensive Tax Benefits for Education publication at IRS.gov. For additional savings, don't print it - the document is 94 pages long. Of course, there are limits to deductions and some benefits cannot be combined, and both the education credits cannot be used for the same student in the same year. Educate yourself on the benefits or use your local tax professional; it's your money and you shouldn't leave it with the IRS.