College and Taxes: The Importance of Determining
Who Takes the Dependency Deduction — Parent or Student?
If you or a member of your household is a college student or returned to school for additional training in the past year, there are important tax considerations to discuss with your CPA as you organize your state and federal income tax return information for 2014, advises the Virginia Society of Certified Public Accountants (VSCPA).
One important tax-planning decision relates to the dependency deduction. Students who file a tax return might incorrectly claim their own personal exemption, which denies a parent or guardian from taking the deduction for their dependent child. But talking to the student before tax season and meeting with a CPA can help you determine who is entitled to the deduction.
Who can claim the deduction for the student is based on the tax code’s tests of age, residency, relationship and the level of financial support the student receives.
The U.S. Internal Revenue Service (IRS) will only accept one return with the personal exemption deduction for a specific individual and that will normally be the first filed return. Therefore, the parent could lose the exemption deduction advantages along with any related tax benefits if the child incorrectly claims it first. In addition, the processing of the parent’s return will be delayed if the deduction for the child’s exemption is attempted a second time. The parent also could be audited and/or face an assessment for more tax, penalties and interest. If the student claims a deduction he or she is not entitled to (whether it relates to the dependency exemption or anything else), then an amended return is required.
Other college related tax benefits include:
American Opportunity Tax Credit — You may be able to claim a credit of as much as $2,500 for qualified tuition and related expenses for each eligible student on your federal individual income tax return. This credit is partially refundable (40 percent) for some taxpayers. This means you might be able to claim the credit and get a refund even if you do not owe taxes.
Lifetime Learning Tax Credit — You may be able to claim a credit of as much as $2,000 for qualified tuition and related expenses per tax return. This credit is nonrefundable.
Tuition and Fees Deduction — You may qualify to deduct as much as $4,000 in qualified tuition and related expenses even if you do not itemize deductions on Schedule A, Form 1040 if the provision is renewed.
The education credits and tuition and fees deduction have overlapping but different rules. Further, the same expenses cannot be used to gain more than one tax benefit. It can be challenging to determine which tax benefits you are eligible to claim. And when you are eligible to claim more than one, an additional challenge is figuring out which is the best to use for your situation. There is increased talk in Congress about simplifying this area but no major changes are expected to take effect for use before 2015 tax returns.
Student Loan Interest Deduction — You may be able to deduct on your federal individual income tax return as much as $2,500 of the qualifying interest you paid on student loans if the provision is renewed.
The tuition and fees deduction and student loan interest deduction both expired Dec. 31, 2013, and are not currently available for 2014 tax returns with their status uncertain due to Congress’ inaction. However, they are both expected to be renewed retroactively with numerous other expired provisions.
Questions about college planning or how to reduce your tax burden while in college or paying for college? Contact a CPA.