Harvest Financial Group is located at 759 John St., Suite D in Yorkville Illinois. We provide Tax Planning and Return Preparation, Small Business accounting and support of Quickbooks products, as well as Wealth Planning* and Asset Management services.
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Before taxpayers and/or their dependents enter the classroom, it would benefit them to educate themselves about the many tax provisions related to education that may save them tax dollars. This is especially true because postsecondary education and its costs have been on the rise. Undergraduate enrollment rose 25% between 1997 and 2007, while graduate enrollment rose 67% between 1985 and 2007. If those enrollment numbers seem surprising, consider the cost of the education for those enrolled. While the average tuition, room, and board for students at the nation’s four-year public colleges and universities for the academic year 2007–2008 was $13,424, the cost for four-year private colleges and universities during that period was $30,393.
Given the size and frequency of these educational costs, taxpayers must take advantage of any opportunities to mitigate them. This is important not only for tax compliance reasons but also—and perhaps more beneficially—for financial planning reasons. In fact, these potentially significant tax-saving measures could affect not only the taxpayer but also multiple generations within the taxpayer’s family.
Categories of Exclusions
Perhaps the most advantageous available tax benefits are six exclusions for educational benefits that would otherwise be taxable. The IRS has established a hierarchy within which these six exclusions function that allows taxpayers and their family members to take advantage of multiple exclusions for qualified tuition and related expenses.
· Employer-Provided Educational Assistance
There are two deductions for adjusted gross income (AGI), allowing nonitemizers, particularly students and recent graduates, to benefit through lower taxes. However, the amount is capped and limited based on Modified Adjusted Gross Income. Taxpayers should evaluate taking the tuition deduction relative to using the tax credits to determine which alternative minimizes their tax liability.
· Student Loan Interest
Education Expenses Deducted from AGI
Employees who find themselves paying for education expenses related to their employment that are not reimbursed by their employer may be able to deduct these expenditures. This deduction differs from the above-the-line deduction for tuition and fees because the expenses must be related to the taxpayer’s trade or business. Employees may take a deduction for all the “ordinary and necessary expenses paid during the tax year in carrying on a trade or business. This deduction is available if the education maintains or improves the skills required by the employee in his or her employment or other trade or business, or meets the express requirements of the employer (or those of the applicable law or regulations) that are required as a condition to the retention of the employee’s established employment relationship, employment status, or rate of compensation.
However, these deductions are not without limitations. Expenditures used to meet the minimum educational requirements of an employer or used to qualify the taxpayer for a new trade or business are treated as “personal expenditures” are nondeductible. However, if no limitation is applicable, such ordinary and necessary expenditures are deductible as miscellaneous itemized deductions from AGI (in the aggregate those deductions must exceed 2% of AGI). There is no limit on the amount of the deduction or the year of payment, and the expenses are not limited to tuition and enrollment fees . Further, these expenses may include reasonable allowances for transportation and qualified travel, compensation for services rendered, and rental payments for property for purposes of employment.
In addition to deductions, the Code contains tax credits that taxpayers can use to receive credit for educational costs. The American Recovery and Reinvestment Act expanded (and renamed) the Hope credit for 2009 and 2010.
· Hope Scholarship Credit
The time to take advantage of tax-saving measures in connection with the costs of postsecondary education is now. As detailed above, due to recent legislation, case law, and IRS pronouncements, the Code contains provisions that may mitigate the ever-rising costs of enrollment in postsecondary educational institutions. However, as part of the planning process, taxpayers must be aware of the limitations and requirements embedded within the Code sections or they may fail to recognize the opportunity to take advantage of these benefits.
In addition to the exclusions and credits itemized above, current economic conditions have resulted in an increasing default rate on student loans. Normally, forgiveness of such debt is taxable. However, a number of options are now available to qualifying students that would provide an exemption from income for that debt forgiveness.
In the end, taxpayers and their tax advisors must evaluate available alternatives in order to maximize tax benefits and minimize tax liability. Given the multitude of tax benefits and their detailed requirements, an education should start well before the first day of school in order to make use of tax-saving (and ultimately cost-saving) measures.
Call us if you are concerned about planning for the ever increasing education costs and how we can help you plan for them.