This letter explains the tax strategies available to assist you with the cost of education. There are several tax provisions that deal with the cost of education. There are costs involved with funding your children’s primary and secondary education, and post-secondary education. There are ongoing educational costs for those in the work force, and for those interested in continuing their education beyond technical requirements.
The tax law provides for savings vehicles and tax credits and deductions for expenses that qualify under the specific provisions. This letter will identify those opportunities, but we should meet to discuss your specific circumstances and needs to develop a plan that is appropriate for you and your family.
To assist with primary and secondary education, there are the Coverdell education savings accounts. The contributions into these accounts are not deductible, but the dollars grow tax free and the distributions are tax free to the extent that they are used for qualified expenses.
You can also fund §529 plans with contributions that enjoy an exception to the general rules regarding the annual exclusion for gift tax purposes. The amounts grow tax free and the distributions are also tax free to the extent used for qualified post-secondary education expenses. These expenses include tuition and a modest amount of room, board and supplies. These plans are set up by each state and, therefore, careful planning is necessary to ensure that you select the best plan for your needs.
The American Opportunity Credit can reduce your tax for expenses associated with the first four years of college education. The amount of American Opportunity credit is a maximum of $2500 per eligible student for maximum of four year for tuition and other related course materials expenses for the first four years of college education.
The lifetime learning credit is available for ongoing post-secondary expenses. The lifetime learning credit is allowed against the first $10,000 of expenses for tuition and related costs for any course of post-secondary instruction. The maximum credit amount is 20% of all qualifying expenses.
American Opportunity and Lifetime Learning credits have overlap between the type of expenses that quality and application of income limitations, so they should be evaluated carefully. Expenses that are used for the credits cannot have been paid for by scholarships or other tax-free money.
Finally, to the extent that your educational expenses are incurred to improve or maintain your existing skills, they are deductible as trade or business expenses or as miscellaneous itemized deductions. However, it is important to note that the same expenses cannot be claimed for both a deduction and a credit.
Please contact our office for assistance in optimizing the tax benefits from your educational expenses.
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