Back-to-School Tax Tips

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With crushing student loan debt and the skyrocketing costs of education at all levels making headlines and policy debates, the approaching start of the next school year led the folks at TaxAudit.com to put together this list of education-related tax tips.

Some will save your clients money and others will save them trouble with the IRS.

School Uniforms:
School uniforms are not deductible, even if they are required.

Private School Tuition:
The cost of private or parochial school tuition isn’t deductible either.

Some Private School Costs, However:
If you can separate the educational costs from the child care component of private school tuition, those costs may be deductible for children up to the age of 13.

Before- and After-School Care:
For a child up to the age of 13, the cost of before- or after-school care may be deducted if it is a qualifying expense. Cable bills and Barney DVDs do not qualify.

Tax Deductions for School Fundraisers are Limited:
There are limits here; among other things, you are required to reduce your deduction by the market value of any goods received in return for your charitable donation.

Moving Expenses for College:
These are not deductible. Going away to college is not moving for a job, so the IRS does not allow the moving expenses deduction.

Earnings in 529 Plans:
The earnings in 529 plans are NOT taxable for federal purposes. The money grows tax-free and withdrawals are not taxable as long as the money is used for eligible college expenses.

Tax-Deferred Accounts:
You can use tax-deferred accounts (i.e., an Educational Savings Account) to pay for qualified educational expenses including books and computers, for elementary, high school and college expenses.

The American Opportunity Credit:
The AOC can amount to $2,500 in tax credits per eligible student and is available for the first four years of post-secondary education at a qualified education institution. Up to 40% of the credit is refundable, which means that the taxpayer may be able to receive up to $1,000, even if they have no tax liability. Eligible expenses include tuition at an eligible institution, books and required supplies, but not room and board, medical expenses, insurance, etc. Income limits apply.

Lifetime Learning Credit:
This credit can be worth up to $2,000 for qualified education expenses paid for a student enrolled in an eligible educational institution. It is a nonrefundable credit of 20% of a maximum $10,000 in qualified education expenses. There is currently no limit on the number of years a taxpayer can claim the Lifetime Learning Credit for an eligible student. Income limits do apply, however.

Student Loan Interest:
There is a student loan interest deduction of up to $2,500 for paying interest on a student loan (also known as an education loan) used for higher education. The amount of the student loan interest deduction is gradually reduced (phased out) if the taxpayer’s modified adjusted gross income is within a certain range.

Tuition and Fees Deduction:
The tuition and fees deduction applies to qualified education expenses for higher education on an eligible student. The deduction gradually phases out between a certain income range until no deduction is allowed. The deduction is available for one or more qualified courses and there is no limit to the number of years the deduction can be claimed.

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