Tax

Tax Planning for Education

2015
Author:  Brandon Baum

Brandon Baum

Associate

Tax

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

With education costs increasing exponentially, many taxpayers are seeking relief to ease the impact of current and future student tuition and fees. Prepaid tuition plans, savings plans and tax credits may be available to ease the burden of paying for college. While many of these programs have considerable limitations, some planning ideas can offer benefits for individuals and families in virtually any tax bracket.

American Opportunity Tax Credit (AOTC)

For the first four years of postsecondary education, the AOTC may be available for current educational expenses for you or your dependents. The AOTC provides a tax credit of up to $2,500 per year per student. If the credit exceeds the tax liability of the taxpayer, a refund may be available of up to $1,000. Eligible costs are limited to tuition, fees and course materials; room and board expenses do not qualify.

A high-earning parent should consider shifting AOTC eligibility to a dependent student as a planning option. The credit phases out completely at income levels of $90,000 for single filers and $180,000 for joint filers. Taxpayers will forgo a dependency exemption for that student if they shift the credit, so discuss the situation with your advisor to compare the tax impacts of available options. The AOTC is nonrefundable on a dependent’s return, making it most useful to dependents with tax due.

Lifetime Learning Credit

The Lifetime Learning Credit, which is capped at 20 percent of eligible expense not exceeding $10,000, i.e., a maximum credit of $2,000 is available for most postsecondary education. It’s commonly used when the AOTC is exhausted, because the credit is less and cannot be combined with the AOTC. The credit phases out completely for those with income of more than $65,000 for single taxpayers and $130,000 for married taxpayers filing jointly.

Tuition & Fees Deduction

The tuition and fees deduction provides a more direct reduction of income than most itemized deductions. The deduction can help taxpayers with income close to or triggering limitation thresholds such as the IRA deduction limits and taxability of Social Security benefits. A deduction of up to $4,000 is available for tuition and fees required for enrollment paid during the year. The deduction is phased out completely at income levels above $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. The deduction is not available to married individuals filing separately, to individuals qualifying as dependents on another’s return or to taxpayers claiming either the AOTC or Lifetime Learning Credit for the student incurring the expenses.

(The provision expired in 2014 and no extension has been approved for 2015 as of publication.)

Section 529 Plans

A 529 plan is an educational savings plan a taxpayer may set up, with after-tax funds, for a beneficiary. A 529 plan can offer planning options to individuals and families of all income levels, since income phaseouts are not an issue. There are two main 529 program types. A 529 prepaid tuition plan allows the taxpayer to prepay some or all tuition costs at certain rates. A 529 savings plan lacks the prepaid rate component but allows taxpayers to pay a number of higher education expenses—including room and board, tuition and books—not covered by prepaid plans. Plans also may be transferrable between beneficiaries.

These plans offer federal tax benefits, such as tax-free investment growth as long as distributions are used for qualified expenses. Many states offer deductions or credits for 529 contributions, but limits and programs vary by state. Consult your advisor about state and gift tax considerations before making a contribution.

529 Information for Selected States

Arkansas
Tax Benefit:  Up to $5,000 deduction for single filers ($10,000 for joint).
Tax Benefit Available for Out-of- State Contributions? No

Colorado
Tax Benefit:  Deduction for lesser of allowable contribution or AGI for that year.
Tax Benefit Available for Out-of-State Contributions? No

Illinois
Tax Benefit:  Up to $10,000 deduction for single filers ($20,000 for joint).
Tax Benefit Available for Out-of-State Contributions? No

Indiana
Tax Benefit:  Tax credit equal to lesser of 20% of contributions, $1,000 or tax liability.
Tax Benefit Available for Out-of-State Contributions? No

Iowa
Tax Benefit:  Up to $3,163 deduction for single filers ($6,326 for joint) per beneficiary.
Tax Benefit Available for Out-of-State Contributions? No

Kansas
Tax Benefit:  Up to $3,000 deduction for single filers ($6,000 for joint) per beneficiary.
Tax Benefit Available for Out-of-State Contributions? No

Kentucky
Tax Benefit:  No tax benefit available.

Mississippi
Tax Benefit:  Up to $10,000 deduction for single filers ($20,000 for joint).
Tax Benefit Available for Out-of-State Contributions? No

Missouri
Tax Benefit:  Up to $8,000 deduction for single filers ($16,000 for joint).
Tax Benefit Available for Out-of- State Contributions? Yes

Nebraska
Tax Benefit:  Up to $5,000 deduction for single filers ($10,000 for joint).
Tax Benefit Available for Out-of- State Contributions? No

Ohio
Tax Benefit:  Up to $2,000 per beneficiary, but remaining is carried forward.
Tax Benefit Available for Out-of- State Contributions? No

Oklahoma
Tax Benefit:  Up to $10,000 for single filers ($20,000 for joint), any amount in excess is carried forward five years.
Tax Benefit Available for Out-of-State Contributions? No

Pennsylvania
Tax Benefit:  Up to $14,000 deduction for single filers ($28,000 for joint) per beneficiary.
Tax Benefit Available for Out-of-State Contributions? Yes



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