Randy J. Elder, CPA, P.C.

Maximize education tax benefits

This is one of the few win-win deals when it comes to taxes. I think most of you will agree that education has positive benefits for the individual, community and society as a whole. And when you can receive tax benefits for pursuing education, what’s not to like?

Tax benefits for education

The tax code includes various incentives that can provide tax benefits for your education as well as that of your spouse or children. But proper planning is needed to determine which incentive is best for your situation and to ensure you maximize your benefits.

Types of education tax incentives

Student loans. These are highly utilized and often make education possible. But we have all heard of the significant student loan debt that has accumulated and the difficulty graduates are having in paying it down. Before you pursue a loan you might want to see if any of the other options mentioned below are suitable for your situation.

If debt is the way you need to go, you might also want to look at home equity loans. Student loans generally have higher interest rates than a home equity loan which may also offer a longer repayment term and lower payments. When deciding between a student loan and home equity loan it is important to keep in mind the following restrictions.

Gifting low basis assets. This is another commonly used method of financing education. Under this method, appreciated assets (typically stock) are gifted to children who then turn around and sell the stock to pay for their education. This allows the taxpayer to transfer any gain on the stock to the child at a time when the child has little to no income. The benefit to the taxpayer is that the tax on the gain is avoided or taxed at a much lower rate. Unfortunately Congress got wind of this and curtailed income shifting to children by making most full-time students under the age of 24 subject to the “kiddie tax.” This effectively taxes their unearned income at their parents’ tax rates and makes the gifting of appreciated assets to a child less appealing as a way to finance college expenses.

Education Credits.

The tax code provides two types of post-secondary education tax credits for taxpayers and their dependents.

Careful timing of tuition payments under either of these options is critical for maximizing the tax benefit.

Education Savings Programs

The tax code provides two different plans if you are interested in setting up a formalized long-term savings program to pay for education expenses for your children.

Both plans provide tax-free earnings if used for qualified education expenses.

Educational Savings Bond Interest

Another option for financing education is the use of Series EE or I bonds purchased after 1989. All or part of the interest on these bonds is exempt from tax if qualified higher education expenses are paid in the same year that the bonds are redeemed. The tax benefit is phased out for joint filers with income between $115,750 and $145,750 ($77,200 and $92,200 for unmarried taxpayers, but those using the married filing separately status do not qualify for the exclusion).

If you would like to learn more about these benefits, or to work out a comprehensive plan to take advantage of them, please give me a call.