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Wolters Kluwer, CCH can assist you with stories, including interviews with subject experts.
Also, the 2014 Whole Ball of Tax is available in print. Please contact:
 
Eric Scott
(847) 267-2179
eric.scott@wolterskluwer.com
 
Brenda Au
(847) 267-2046
brenda.au@wolterskluwer.com

Visit the Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.

Wolters Kluwer, CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation.

 
2014 CCH Whole Ball of Tax
Release (21) | Back to WBOT

2014 Wolters Kluwer, CCH Whole Ball of Tax

Contact:
Eric Scott , 847-267-2179, eric.scott@wolterskluwer.com
Brenda Au , 847-267-2046, brenda.au@wolterskluwer.com

Wolters Kluwer, CCH Charts Available Education Tax Breaks

What Students, Parents and Teachers Should Know

Many education-related tax break opportunities remain available to students and families looking to save on tuition and other school expenses, but figuring out which ones you may qualify for can be confusing. CCH, a part of Wolters Kluwer and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), takes a look at proposed changes and charts the current status of educational tax breaks.

Legislation to Consolidate, Simplify Options

In response to criticism of specific requirements for various education tax breaks that can be confusing, a bill was introduced in the House of Representatives back in October of last year that called for consolidating the American Opportunity Tax Credit (AOTC), the Hope Credit, the Lifetime Learning Credit along with the Tuition and Fees deduction. It calls for matching the maximum $2,500 credit offered in the American Opportunity Tax Credit, but would start phasing out at $86,000 of adjusted gross income (AGI) for joint tax filers – significantly less than the current joint AGI filing level of $160,000. The bill has not moved to the Senate yet for consideration.

Gone for 2014

Although the American Taxpayer Relief Act (ATRA) preserved some education tax breaks from expiring, one that did phase out at the end of 2013 was the provision that enabled teachers to deduct up to $250 of their own out-of-pocket expenses for buying classroom supplies. Also coming to an end in 2013 was the $4,000 deduction for qualifying tuition and other education-related expenses that taxpayers spent on themselves, a spouse or a dependent.

Comparing Tax Credits

Two popular education tax breaks are the American Opportunity Tax Credit, which provides up to a $2,500 credit for qualifying educational costs, and the Lifetime Learning Credit. The table below examines specifics and qualifications for each:

American Opportunity Tax Credit

Lifetime Learning Credit

What it is

An enhanced Hope Credit of up to $2,500 per student per year for the first four years of post-secondary qualified tuition and expenses.

A credit of up to $2,000 per return based on expenses for post-secondary education or courses to improve job skills.

Credit amount

100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000. Use Form 8863, Education Credits.

20% of the first $10,000 in qualifying expenses, to a maximum $2,000 credit. Use Form 8863, Education Credits.

Qualifying expenses

Qualified tuition and related expenses, including expenditures for course materials, such as books, supplies and equipment.

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Credit phaseout ranges

Modified adjusted gross income (AGI) is $80,000-$90,000 for single filers, $160,000-$180,000 for joint returns.

Up to 40% of the credit amount is refundable if the taxpayer’s tax liability is insufficient to offset the nonrefundable credit amount.

These numbers are not subject to inflation adjustment.

Modified AGI increases to $54,000-$64,000 for single filers for 2014 (was $53,000-$63,000 for 2013) and $108,000-$128,000 for joint returns for 2014 (was $107,000-$127,000 for 2013).

Who can/can’t claim it

Can’t be taken if married filing separately.

Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Student must be enrolled in program leading to degree or other recognized credential, studying at least half-time.

Can’t be used for graduate or professional level programs or by anyone with a felony conviction for a state or federal drug offense.

Cannot be claimed by the student if he or she has unearned income subject to the “kiddie tax.”

Can’t be taken if married filing separately.

Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

What to watch out for

Can’t be taken if Lifetime Learning Credit or tuition and fees deduction is taken for the same student.

Can’t be taken if American Opportunity Tax Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell Educational Savings Account (Coverdell ESA) or qualified tuition program (529 plan), but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per return.

'Above-the-line' Deductions

Students can also claim the loan interest deduction over more time under ATRA and at higher income levels. Voluntary interest payments may also be deducted. The Tuition and Fees and Student Loan Interest Deductions are compared below.

Tuition and Fees Deduction

Student Loan Interest Deduction

What it is

A deduction from gross income of up to $4,000 ($2,000 if modified AGI exceeds $65,000) based on expenses for post-secondary education.

A deduction from gross income of up to $2,500 based on interest paid on a student loan for post-secondary education.

This deduction would only have been allowed to be claimed for the first 60 months of the required payments starting in 2013. Under the ATRA, this rule was permanently suspended.

Deduction amount

100% of the first $4,000 ($2,000 if modified AGI exceeds $65,000 for single filers, $130,000 for joint filers) in qualifying expenses.

Taken on Form 1040A or 1040.

100% of the first $2,500 in qualifying expenses.

Taken on Form 1040A or 1040.

Qualifying expenses

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Loan may cover books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution. Interest payments are deductible for the entire period of the loan.

Deduction phaseout ranges

Full deduction is only allowed if modified AGI is not greater than $65,000 for a single filer, $130,000 for joint filers.

Taxpayers whose income exceeds that limit but does not exceed $80,000 for a single filer or $160,000 for joint filers may deduct up to $2,000 in qualified expenses in 2014.

For 2014, modified AGI is $65,000-$80,000 for a single filer, $130,000-$160,000 for joint filers.

 

Who can/can’t claim it

Can be taken by qualifying individuals including themselves, a spouse or a dependent.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return, but parent can claim credit for child’s expenses.

The ATRA allows the deduction to be taken even for voluntary payment of interest.

Must have been in degree program and at least half-time student to take the deduction.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.

What to watch out for

Can’t be taken if AOTC or Lifetime Learning Credit is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program but not for same expenses.

Can be taken for expenses paid for with student loan.

Deduction is not available on Form 1040EZ.

Deduction is taken on Form 8917, Tuition and Fees Deduction.

Must reduce qualified educational expenses by the total amount paid through tax-free sources such as tax-free withdrawals from Coverdell ESAs.

Deduction is not available on Form 1040EZ.

529 Educational Savings Plans, Coverdell Accounts

With the ATRA, the $2,000 contribution level for Coverdell Education Savings Accounts (Coverdell ESA) was made permanent. Had this not occurred, the contribution level would have reverted to $500 beginning in 2013. Below are tax break comparisons between Coverdell accounts and 529 college savings plans.

Coverdell Education Savings Account (ESA)

Qualified Tuition Program (529 Plans)

What it is

A savings account for educational expenses in which earnings grow tax-free. Withdrawals also are tax-free if used to pay for qualified educational expenses.

Three general types of 529 plans exist:

  • Pre-paid tuition plans – generally guaranteeing future tuition coverage at a state university.
  • State 529 college savings plans – generally sponsored by a state, allowing you to use saving plan proceeds to attend a state or private university.
  • Independent 529 plans – sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools.

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state-sponsored programs are partially or fully deductible on some state tax returns.

Contribution limits

The ATRA makes permanent the $2,000 maximum annual contribution per year per beneficiary.

As with IRAs, contribution can be made up to the tax filing deadline, which is April 15, 2014.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $300,000. In the case of many 529s, accounts can be opened with as little as $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

Qualifying expenses

Can be used to pay for tuition, fees, books, supplies and equipment for both K-12 and post-secondary.

For K-12, can also pay for uniforms, transportation, supplementary items and services such as extended day programs, room and board, and purchase of computer technology and Internet access (but cannot be used for sports, games or hobby software unless it is predominantly educational).

For post-secondary education, can cover expenses for room and board if the student is enrolled at least half-time and the amount meets certain guidelines. Can also be used to fund a qualified tuition program.

Distributions can be used for accredited post-secondary books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, and student activity fees and course-related fees paid directly to the accredited post-secondary educational institution.

Expenses related to the cost of computer equipment, technology or Internet access are not considered qualifying expenses for excluding qualified tuition plan distributions from gross income.

Contribution phaseout ranges

The phaseout ranges from modified AGI of $95,000-$110,000 for single filers, $190,000-$220,000 for joint filers; no phaseout for corporation or other entities, including tax-exempt organizations. These numbers are not subject to inflation adjustment.

No income limitations.

Who can/can’t claim it

Beneficiary must be younger than 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion ($14,000 and $28,000 for 2013 tax filing) or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

What to watch out for

Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be made in cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

Check tax treatment of contributions for state income tax purposes.

Limited ability to change investment options.

Possible 10% penalty if distributions are not used for qualified expenses.

Beneficiary can be changed if new beneficiary is a member of the same family.

In the case of the Independent 529 plans, if your child does not attend a member college and you either withdraw the money or transfer it to a state-run plan, you won’t be able to collect more than a 2% gain on the money you invested – even if the return realized was in excess of this.

Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.

Exclusions

Several exclusions also are available for taxpayers related to education:

  • Bond interest: All or part of the interest on proceeds of qualified savings bonds (specifically, Series I bonds or qualified Series EE bonds issued after 1989) cashed to pay education expenses. For 2013 tax filing, modified AGI eligibility phaseout ranges are $74,700-$89,700 for single filers, $112,500-$142,050 for joint returns; and increase in 2014 to $76,000-$91,700 for single filers, $113,950-$143,950 for joint returns.
  • Employer assistance: For 2013 tax filing, employer-provided educational assistance (up to $5,250 annually) can be excluded from income for undergraduate or graduate level coursework and expenses. Set to expire after 2012, the ATRA made this tax break permanent.  
  • Scholarship funds: Scholarship money or tuition reduction from income up to the amount spent on qualified expenses; generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services. Also made permanent by ATRA is the exclusion for Armed Forces and National Health Service Corps scholarship programs.
  • Student loans: The amount of a cancelled student loan is also excluded from gross income. (Normally, a cancellation of indebtedness counts as income.) The discharge must be made under the terms of a loan agreement and made because the person works for a specified period in certain professions for certain kinds of employers – for example, as a doctor or nurse in underserved areas.

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SOURCE: Wolters Kluwer, CCH: 2014

Permission for use granted.

       


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