Starting January 1 of this year, a major reform in the Tax Code was passed and immediately implemented. For most of us, that may not seem like big, life-altering news as it doesn’t appear to have much of an impact on our daily lives. Unfortunately, this means we can easily find ourselves in a place of ignorance. Contrary to tax professionals, accountants, and top-tier businessmen, the average American doesn’t receive the hours upon hours of training needed to comprehend this new tax reform. Many of us, like myself, are left wondering the question, “How does this impact me?”
Throughout this article, my goal is to help alleviate some of the anxiety and fear regarding the tax reform that will, in some sort or fashion, affect your taxes for this coming tax season–whether you are a full-time working father with a wife and three kids at home or you are a freshman in college. As an Accounting major, I have learned more than the average student my age about the tax reform, yet I don’t consider myself, in the slightest, a tax professional. However, as I have researched, there are many kinds of Tax Planning strategies that college students, as well as their parents, can take! Here are the main three:
First, let me explain tax credits. The use of tax credits is going to be most beneficial for taxpayers, for a tax credit is a dollar for dollar reduction of the income tax you owe, which basically means that the credits you claim are saving you that amount of money!
The American Opportunity Credit
While being the most beneficial tax break, the American Opportunity Credit is the most difficult for which to qualify. Here are the qualifications (regarding the person the tuition is paid for):
Within your first four years of post secondary education–Sorry, but “super seniors” don’t have the benefit of this one for their fifth year
Enrolled in a degree or certificate program
Taking classes at least half-time–For my school, half-time is considered 6 credits
Have no felony drug convictions
In addition to the qualifications aforementioned, the person claiming the credit must have an Adjusted Gross Income (AGI) of less than $80,000 if filing Single or $160,000 if Married filing joint. Partial credits may be received for AGIs that are no more than the “phase out” limits of $90,000 if filing single or $180,000 if married filing joint.
Here’s how it works:
100% of the first $2,000 of “qualified educational expenses” and 25% of the next $2,000
Maximum credit of $2,500
“Qualified educational expenses” include tuition, student activity fees paid to the school, books, equipment, and supplies needed for a course
The Lifetime Learning Credit
Although qualifying for the Lifetime Learning Credit is less restrictive, the taxpayer must “spend more” in order to reap the full benefits of the credit. The qualifications, as contrasted with the American Opportunity, are as follows:
What makes the Lifetime Learning Credit more difficult to qualify for is that the person claiming the credit must have an AGI of less than $55,000 in filing single and $110,000 in married filing joint (with “phase out” limits of $65,000 single and $130,000 married filing jointly). In order to benefit from the maximum credit of $2,000, only 20% of qualifying educational expenses worth up to $10,000 are eligible. Further, this credit is limited per return instead of per student.
The Tuition and Fees Deduction
Contrary to the previous credits, the tuition and fees deduction is a tax deduction taken to exclude a maximum amount of $4,000 to one’s net income. The one claiming is not required to take itemized deductions in order to benefit. Essentially, the tuition and fees deduction is for those whose incomes exceed the Lifetime Learning Credit thresholds. Further, the amount of savings depends on the taxpayer’s tax bracket, meaning the amount deducted saves you how much that amount would have been taxed at. For example, if John was in the 24% tax bracket and was able to deduct $4,000 from his net income, he would be saving $960 in taxes that he no longer is required to pay. Notice the difference between a deduction and a credit, for a credit deducts, dollar for dollar, the amount of net income tax a taxpayer owes, and a deduction lowers your income that can be taxed.
There are many more ways individuals can benefit from the new tax reform, so as you go into this next season, don’t be fearful of the change but embrace it and use it to your advantage!
Information for article retrieved from the following:
Frankel, Matthew. (2018 March 17). Your 2018 Guide to College Tuition Tax Breaks. Retrieved from: https://www.fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx