College Tax Savings: 2014 Edition

Every little break helps Category: Planning

With the start of school just around the corner, it is hard to ignore the high cost of funding a college education. Thankfully, there is some help within the tax code. Outlined here are three of the more popular ways to reduce your taxes in 2014 as a result of this educational expense burden. Who Qualifies: Typically you, your spouse, or a dependent who can be claimed as an exemption on your individual tax return Qualified Expenses: Tuition and fees, course-related books, supplies and equipment Common Tax Benefits: American Opportunity Credit. Amount of Credit: $2,500 per eligible student at an eligible institution ( 100% of initial $2,000 and 25% of the next $2,000 of eligible expenses) Frequency: Available for the first four years of post-secondary education Comments: In 2014, 40% of this credit is a “refundable” credit. This means you can receive up to $1,000 even if you owe no federal income taxes. Lifetime Learning Credit. Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 in eligible expenses) Frequency: No limit on number of years you can claim the credit Comments: The income limits for this credit are much lower than for the American Opportunity Credit. Student loan Interest Deduction. Amount of Deduction: Reduce up to $2,500 of your income subject to tax Frequency: Per taxpayer per year. Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions. The One that Got Away? Tuition and Fees Deduction There is also a Tuition and Fee deduction for up to $4,000 in eligible expenses that was available to taxpayers through 2013. Unfortunately, this educational benefit has not been extended into 2014. So if you have used this deduction in the past, it is time to review your other alternatives. But be prepared in case Congress extends this tax benefit once again. Tips to Maximize your Tax Benefit The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple, eligible students, the American Opportunity may be a better choice. Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits. You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits. Gifts, bequests, or inheritances do not reduce your eligible expenses. Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return. Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts you could subject yourself to a 10% tax penalty. Remember, like most tax provisions, these benefits are all subject to income limitations. To receive the maximum credits noted above your Modified Adjusted Gross Income must be below beginning phase-out amounts. When you reach the maximum phase-out amount you are no longer eligible for the tax benefit. For 2014 they are: Educational Benefits: 2014 Modified Adjusted Gross Income Phase-outs Filing status American Opportunity Credit Lifetime Learning Credit Student Loan Interest Single $80,000 – 90,000 $54,000 – 64,000 $65,000 – 80,000 Married Filing Joint 160,000 – 180,000 108,000 – 128,000 130,000 – 160,000

Fund Your Retirement or Your Child's College?

Fund Your Retirement or Your Child's College? Category: Retirement

As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education. The dilemma With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do? Retirement prior to education In most cases it is more important for parents to put their financial needs ahead of their children. Why? One of the best ways you can help your child in the long-term is to ensure you won’t be a financial burden on them in the future. Your children can take out education loans, while lending options during retirement years are limited. There are numerous programs available to your child to help them afford college. While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement. Some tips to consider There is plenty of opportunity to fund both retirement and college education in a tax advantaged way. You might wish to consider funding basic retirement needs first, then look at tax advantaged educational savings programs. Retirement: First fund employer provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children. Child’s Education: Look into Cloverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings. Consider other ways to generate college funds. Here are some ideas; Start saving for both retirement and college early. Use time to help grow the value in your accounts. Attend a public versus a private college Look into work-study alternatives Review and apply for grants and scholarships If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school. Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found.