• Wealth Management Division

Higher Education Expenses: Are They Tax Deductible?

As a start of a school season is approaching fast, parents and grandparents of high school students are filled with nostalgia for the child they have seen grow up, as well as anxiety about what lies ahead. It's natural to want to assist that prospective learner in overcoming the financial barriers to a superb education, and it would also be beneficial to understand how to set up proper financial assistance for your children or grandchildren while avoiding any additional tax obligations.


What School Expenses Are Eligible?


If you are assisting your child in paying for their education, the IRS provides education credits. These can be used to deduct eligible expenditures made using cash, check, credit card, debit card, or loan funds. However, if you pay using loan funds, your credit is only valid for the year in which you make the payment.


These qualifying expenses are as follows:

  • Tuition

  • Fees

  • Expenses incurred as a result of enrollment or attendance

  • Expenses that are eligible for the American Opportunity Tax Credit (AOTC)

Remember that the AOTC has phase-out restrictions for families with a modified adjusted gross income of more than $160,000 for married couples filing jointly and $80,000 for single filers. You can still claim a partial credit up to the overall phase-out limit of $180,000 for married couples and $90,000 for single filers.


The AOTC provides up to a $2,500 credit on items designated for studies, such as books, supplies, and equipment, to individuals who qualify. To qualify for the credit, these things do not have to be purchased directly from the school or its bookshop, but they must be allocated to the student.


What Are the Non-Eligible Expenses?


Expenses for sports, activities, hobbies, and courses that do not involve credit are not eligible. These expenditures, however, are exempt if they are required for the student's degree.

Even if you are paying the school directly for the following goods, the expenses are not qualified:

  • Room and board

  • Insurance

  • Medical costs/student health insurance

  • Transportation

  • Expenses for personal, residential, or family purposes (such as meals)

It's also crucial to note that if you utilize money from a tax-advantaged account, a scholarship, or a grant that has no tax implications, you're ineligible for the amounts used. For example, if the student received a $3,000 scholarship, you would deduct that amount before making any other deductions.


Accounts With Tax Benefits.


When deciding how to pay for college, starting with tax-advantaged savings techniques might be beneficial. Here are some college savings vehicles to consider, along with relevant tax concerns.


529 College Savings Plan.


These programs, which are offered by states and some educational institutions, allow you to save up to $15,000 each year for your child's college expenses without having to submit an IRS gift tax return. Each year, a married couple can donate up to $30,000. An individual’s or couple's annual contribution to a 529 plan, however, cannot exceed the IRS's yearly gift tax exception. Without triggering gift taxes, you may be able to front-load a 529 plan with up to $75,000 in initial contributions per plan beneficiary — up to five years of donations in one year. Furthermore, unlike the tax deductions mentioned above, 529 plans can be used to pay for books, supplies, equipment, room and board, and even laptops, tablets, and educational software.


Remember that a 529 plan is a college savings plan that allows individuals to save for education while receiving tax benefits. The tax status of 529 plans in each state is only one issue to consider before contributing to a savings plan. Consider the fees and expenditures connected with the specific plan. The availability of a state tax deduction is determined by your place of residence. The tax laws and treatment in each state may differ. Tax laws in each state may differ from those in the federal government. Non-qualified distribution earnings will be subject to income tax as well as a 10% federal penalty tax.


If your child chooses not to attend college, the beneficiary might be changed to another child in your family. You can even roll over payouts from one 529 plan to another for the same beneficiary (or another family member) without incurring any tax implications.


Grandparents can also create a 529 plan or another kind of education savings. In reality, anybody may set up a 529 plan on anyone's behalf. You can even set one up for yourself.


Coverdell ESAs.


Single filers with modified adjusted gross incomes (MAGIs) of $95,000 or less and joint filers with MAGIs of $190,000 or less can contribute up to $2,000 to these accounts each year. If your income is greater, phaseouts apply above those MAGI levels. Money saved and invested in a Coverdell ESA can be used to pay for college or K-12 education. They cover the categories stated above for 529s and can even be expanded to tutoring and educational transportation.


Contributions to Coverdell ESAs are not tax-deductible, but the accounts grow tax-free and withdrawals are tax-free if utilized for qualifying school expenditures. Contributions can be made until the account recipient reaches the age of 18. The money must be taken when the recipient reaches the age of 30, or else taxes and penalties will apply.


UGMA and UTMA Accounts


These all-purpose savings and investment accounts are frequently utilized for college savings. They take on the shape of a trust. When you place money in a trust, you are making an irreversible gift to your kid. You are in charge of the trust funds until your kid reaches the age at which the trust expires (i.e., adulthood). At that moment, your kid can use the UGMA or UTMA funds to pay for college; but, after that age is reached, your child can use the money for whatever.


Using a trust necessitates the application of a complicated set of tax rules and regulations. Contact us before proceeding with a trust to learn more about the rules and regulations.


Consider the possibility of your child graduating from college debt-free, which is possible with proper college preparation. Contact us today to learn more about these cost-cutting measures.

The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investing goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.

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