Off to college: Deductions, credits may soften the tuition blow

We are circling back to our Sept. 24 post about tax deductions for college students. In that post, we warned that most tax breaks come with conditions, so it is important to work with someone who understands the nuances of the Tax Code. It is also important to remember that you can be the student — many credits and deductions are available regardless of the age of the college enrollee.

For example, we reviewed the American Opportunity Tax Credit program and the Lifetime Learning Credit in September. Both are available to adult learners. In fact, the Lifetime Learning Credit is not available to anyone listed as a dependent on someone else’s return, including your parents’.

It is no secret that America is awash with student loan debt. The decision to borrow to cover tuition and education expenses should not be made lightly. One thing to keep in mind as you plan, though, is that the interest paid on student loans is deductible. To qualify, your modified adjusted gross income cannot be more than $80,000 if filing individually or $160,000 if filing jointly. The maximum deduction in 2015 is $2,500 — likely not even close to what you owe, but still nothing to sneeze at.

If your student loans are more than you can handle, you may have canceled the loans or signed up for payment assistance. In most cases, you would have to count the amount forgiven as income. That is not always the case with student loans, but the exception applies in very limited circumstances.

If you are planning to attend college or preparing for a child to attend college, you may want to look at savings programs like the Coverdell Education Savings Account and 529 Qualified Tuition Programs. The goal here is not to offer immediate relief — contributions are generally not deductible — but to offer tax breaks on interest income and qualifying distributions.

You are not alone if the thought of tuition terrifies you. There are ways, though, to mitigate the expenses. Because your circumstances are unique, you should consider working with a tax attorney or tax specialist before you commit to anything.

Source: Accounting Today, “A Back-to-School Tax Break Refresher,” Michael Sonnenblick, Sept. 22, 2015