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Kelly Bullis: Higher education tax breaks

By Kelly J. Bullis

It’s that time of year. For those of us who graduated from college a “few” years ago, we become nostalgic. That’s why there are “homecoming” events every year. An opportunity for us to walk the grounds and relive old pleasant (and not so pleasant final exams) memories.

Now our kids (and for some of us, our grandkids) are getting ready to go to college. Congress has tried to encourage lower-income families to strive for getting their kids into college by giving out tax breaks. Here is a brief overview.

AOTC (American Opportunity Tax Credit). 100% of the first $2,000 of qualified higher education expenses (QHEE) is fully refundable and 25% of the next $2,000 of QHEE is available to offset other tax, but not refundable. Maximum tax credit per student in your household is $2,500 each. Also, you can claim this annual tax credit for up to 4 years per student. Last week, I talked about how the “rich” pay most of the taxes. Here is one way that happens. The “rich” do not get to use the AOTC credit. For married couples, it phases out between $160,000 and $180,000 in Modified Adjusted Gross Income (MAGI). So if your MAGI puts you into the top 8% of all filers (over $200,000 for married folks), forget this credit. It’s not for you!

LLC (Lifetime Learning Credit). 20% of the first $10,000 of QHEE. Maximum refundable tax credit is $2,000 per taxpayer. This is one of those credits that discriminates against marriage. A “taxpayer” is a tax return. One single person files one tax return. Maximum credit for that single person is $2,000. Two married persons file one tax return. Maximum credit for that married couple is $2,000. This would be a good time to ask, “Do you think Congress does stupid things?” Just like the AOTC, the LLC is not for the “rich.” It phases out between $118,000 and $138,000 of MAGI for a married couple.

Instead of the AOTC or LLC, you may qualify to deduct up to $4,000 of actual tuition and related fees. (This is not a tax credit, just a tax deduction against other taxable income. Thus, if you are in the 22% tax bracket, it would save you potentially $880 in tax.) Of course, if you are “rich” (over $160,000 in MAGI) you don’t get to take this deduction. If you’re married MAGI is under $160,000 but over $130,000, your deduction is cut in half to only $2,000. (As in the AOTC and LLC, single filing limitations are half the married ones.)

Student Loan Interest. The interest you pay is deductible to a maximum of $2,500 per taxpayer. If you are “rich” and pay student loan interest, forget getting this deduction too. This phases out between $140,000 and $170,000 of MAGI for married folks.

CESA (Coverdell Education Savings Accounts). No deduction for putting up to $2,000 per dependent into one of these accounts. It grows tax free and withdrawals made to cover qualified expenses are tax free as well. But wait! If you are “rich” you don’t get this one either! (Well maybe a little bit.) Ability to make a contribution to a CESA phases out between $190,000 and $220,000 of MAGI for a married couple. There is an alternative to the CESA, it’s called a “529 plan.” No income limitations, but it must be a state sponsored plan. Contributions are treated as “gifts” for federal tax purposes. (Watch out for the annual gift tax exclusion of $15,000 per person.) Not enough room here to go into more details on a 529 plan.

Did you hear? Job 13:18 says, “Behold, I have prepared my case; I know that I shall be in the right.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.