College tax-savings opportunities

As we move into August the thoughts of students returning to the classroom comes to mind.

Summer is past the mid-point and folks are planning their return to school.

There are a number of tax benefits that are available which can assist taxpayers with their expenses for higher education. Although these certainly do not cover the increasing costs of higher education, they can at least help to defray some of the costs.

There are three types of education benefits available; credits, adjustments and exclusions.

You may be eligible for one or more of these various tax benefits.

A tax credit reduces the amount of income tax you have to pay and is the most lucrative tax benefit. A negative adjustment reduces your adjusted gross income (AGI) which reduces not only your taxable income but income thresholds based on AGI. There are certain savings plans whereby the interest earned is excluded from income if the money is used for education expenses.

An education credit provides assistance to eligible taxpayers by reducing the amount of taxes owed on your tax return.

In some cases if the credit reduces your tax liability below zero you may even be able to get a refund.

There are two education credits, Lifetime Learning and American Opportunity, with specific rules for each credit, but you must meet the following three rules for either.

First, you, or your dependent or a third party pays qualified education expenses for higher education. Second, an eligible student must be enrolled in an eligible educational institution. And finally, the eligible student must be yourself, your spouse, or your dependent that is listed on your income tax return.

Eligible expenses for both credits include tuition, mandatory fees, books and course-related supplies. It is important to note that room and board are not eligible expenses.

The American Opportunity Credit may only be claimed four times per student. You may only claim one of the education credits for each student during any given year.

The Lifetime Learning credit is not limited to students in a degree-seeking program. Courses taken for general knowledge or enjoyment along with those taken to gain or improve job skills should qualify for the Lifetime Learning credit as long as they are taken from an eligible institution.

If modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is an adjustment for the interest paid on a student loan (also known as an education loan) used for higher education. This adjustment can reduce the amount of your adjusted gross income by up to $2,500. Since Ohio begins calculations with the federal adjusted gross income, this will reduce Ohio taxes as well. This adjustment is claimed without completing schedule A, so it may be claimed even if the standard deduction is chosen over itemized deductions.

There are also tax benefits for qualified tuition programs (QTP), generally referred to as 529 plans.

These are savings plans where the interest earned is excluded from income provided the proceeds from the QTP are used for education expenses. The interest income must be reported but it is not taxable. An added benefit for Ohio residents who use a state-sanctioned QTP is that the money deposited is not taxed at the state level.

It is important to also note that qualified education expenses vary for each type of educational benefit.

For example, room and board qualifies as an eligible expense for the student loan interest deduction, but these do not qualify for the educational credits.

There is quite an extensive array of tax benefits available for students. Make education a little less expensive by taking advantage of these higher education tax benefits.