Thursday, August 25, 2016

Take These Tax Credits To Campus


Education tax credits could shave $10,000 off the cost of a college education -- up to $2,500 a year for an eligible student -- but many consumers and financial professionals are unaware of them, says Larry Pon, head of CPA firm Pon & Associates in Redwood City, Calif.

Pon, a speaker on the student loan debt crisis at a recent roundtable hosted by the California Society of CPAs (CalCPA), is trying to get the word out about the credits. “I don’t know about you,” he says, “but I don’t walk away from $2,500.”

The figures pertain to the American Opportunity Tax Credit, which applies to tuition, fees, books and supplies during the first four years of higher education. Education tax credits that are more commonly used by adults attending graduate or professional school are the Lifetime Learning Credit and the Tuition and Fees Deduction. The Lifetime Learning Credit is worth up to $2,000 per tax return for an unlimited number of years. The Tuition and Fees Deduction can reduce taxable income by up to $4,000.

Only one tax credit per individual is allowed in a given year, but parents can include more than one credit on a tax return if multiple family members, including themselves, are qualified students. An interactive tool on the IRS website helps give families an idea of which education tax credits they may be eligible for, but it’s hard to really know without good financial and tax planning, says Pon, who is also a CFP and PFS.

The American Opportunity Tax credit is completely phased out when adjusted gross income hits $90,000 for a single filer or $180,000 for a married couple filing jointly. Even so, “there is plenty we can do to get below these thresholds,” says Pon. Questions he suggests for taxpayers include, “Do I have capital losses that can be used to offset some capital gains?” “Am I maxing out on a 401(k) plan?” “If I’m age 50 or above, am I taking advantage of catch-up provisions on my 401(k)?” and “Do I have access to a deferred compensation plan and, if so, can I defer my bonus?”

Doing a Roth conversion may not be a good idea for a parent trying to qualify for these credits, he says, because it adds taxable income. When kids are in college, older parents may wish to delay or suspend Social Security benefits to reduce adjusted gross income, he adds. High-income parents should also consider having their children pay their own taxes, says Pon.

Students attending school at least halftime are eligible, regardless of their tax liability, for the $1,000 refundable portion of the American Opportunity Tax Credit, but need at least a $1,500 tax liability for the $1,500 nonrefundable portion of this credit to kick in, he says.

Pon used the Lifetime Learning Credit while earning his master’s in taxation, but the credit doesn’t require enrollment in a degree program. For example, it could be used by a computer professional earning certifications, a chef taking classes at a culinary academy or a financial advisor taking continuing education classes, he says.

Taxpayers seeking education tax credits must file a Form 1098-T, Tuition Statement. It’s provided by accredited schools and shows expenses paid for the year. Parents can download this record at if their children forget to give it to them. Pon has used this service, which is provided by ACS Education Services, a Xerox company.

Pon suggests advisors refer to IRS Publication 970, Tax Benefits For Education. “Any of the nitty-gritty details you want to look at, they’ve got it in here,” he says.