July 2nd Column, College Tax Planning

Summer is nearly half over and this means that students and parents of college bound children have money on their mind. The good news is that the government has made education assistance a priority and has a number of programs designed to take the edge off of these expenses. While the IRS publication dealing with these programs is 86 pages long, I’ll try to highlight a few of the widely available tax benefits that college concerned families need to look into. In my opinion the best type of tax benefit is a tax credit. This is because a tax credit can reduce the amount of income taxes payable on a dollar for dollar basis. The two primary Federal tax credit programs are the Hope Credit and the Lifetime Learning Credit and the State of Indiana also has its 529 contribution credit. We’ll review all three. The Hope credit provides a tax credit for 100% of the first $1,200 of qualified education expenses and 50% of the next $1,200 for a maximum tax credit of $ 1,800. The Hope credit is non-refundable which means that the maximum benefit is limited to the amount of Federal income taxes that the individual or family actually owes. The Hope credit can also only be claimed when you or your supported student are completing their first two years of undergraduate study. After claiming the credit for two years, it is no longer available for that student, but expenses for other supported children may be claimed. The Lifetime Learning Credit is a more flexible tax credit for 20% of qualified education expenses for a maximum credit of $2,000. Unlike the Hope credit, there is no limit to the number of years that the Lifetime Credit can be claimed. Also unlike the Hope credit, the qualified education expenses incurred in order to claim the Lifetime credit do not have to be in the context of pursuing a degree, but can be incurred for other reasons such as improving job skills. Both tax credits cannot be claimed for the same student in the same year and both credits begin phasing out at relatively modest income levels ($48,000 for single filers and $96,000 for joint filers). If your income is too high to qualify for these credits, you can still take many education expenses as a deduction on your federal return. The State of Indiana also has an attractive tax credit associated with the state’s 529 education savings plan. Indiana will provide a credit against your state income tax liability for up $1,000 if you contribute money to the UPromise Indiana 529. The money can be contributed to the 529 plan and then withdrawn to pay expenses in the same year as long as the 529 account stays open with a small balance. So if you qualify, being aware of these credits can provide as much as $3,000 in annual education support for college bound students. As in all things tax related, there are a ton of details associated with these plans and I would highly recommend that you consult a qualified tax advisor.