Category Archives: Tax Credits and Deductions

What’s in a 1098-t

(and what isn’t)

A 1098-t is a tax form that serves several purposes. It reports qualified tuition and fee payments made to your college, as well as scholarships received to offset those costs. But qualified expenses is a big tent-type of phrase that means different things in different situations. All by way of saying, your 1098-t is not an exhaustive list of qualified expenses. Continue reading What’s in a 1098-t

To Borrow or Not to Borrow

Planning for college cash flow can be tricky. It’s not just that the average public university costs over $25,000 per year whereas the average family has saved just over $18,000 total. There’s also the combination of tax credits and their attendant rules, a confusing menu of borrowing options, and misunderstandings about how aid formulas treat savings. Add multiple children with overlapping college years and it’s no wonder many parents throw up their hands in despair. One common theme I hear from parents is a version of, “We’ll just spend our savings until it’s gone and then borrow what we need.” This may or may not be the right answer. Continue reading To Borrow or Not to Borrow

AOTC And New Tax Law

One of the big changes to the tax bill was making our young adult children less valuable to their parents from a tax perspective. The dependent exemption is gone and the child tax credit for 18- to 23-year-old dependents is only $500. The change does open a door to higher-income families for the American Opportunity Tax Credit, though.  The AOTC phases out at MAGI of $160,000, so it’s not unusual for families to be ineligible but to still find college unaffordable.

Here’s how the AOTC works, from irs.gov: Continue reading AOTC And New Tax Law

What’s a Qualified Expense?

Qualified expenses (QHEE’s) are expenses that are eligible for some form of tax benefit such as the AOTC or a tax- and penalty-free distribution from a 529 account. Sounds simple, right? Let the fine print begin! Not all “qualified expenses” qualify for all purposes. And of course the most important rule of claiming education tax benefits: You can’t double-dip. That means that if you use 529 plan funds to pay an expense, you cannot also claim a tax credit for that expense. Continue reading What’s a Qualified Expense?

What Year?

With the change to prior-prior tax year reporting on the FAFSA and CSS PROFILE, it seems that keeping track of what data dates pertain to what is becoming increasingly complicated. This table summarizes the relevant years or dates for each school year.

School Year 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023 2023-2024 2024-2025
FAFSA/ PROFILE Income Year 2016 2017 2018 2019 2020 2021 2022
Assets As Of October* 2017 2018 2019 2020 2021 2022 2023
AOTC Tax Year** 2018, 2019 2019, 2020 2020, 2021 2021, 2022 2022, 2023 2023, 2024 2024, 2025

* Assets are as of the filing date, which may be as early as October or into the following year depending on the school’s filing date.

** Remember that the AOTC can only be claimed for four tax years, so families should decide whether the fall of freshman year is better than spring of senior year for claiming. With the income limit of $160,000 (married filing joint) or $80,000 (single), some families might not be eligible every year.

Parents may find that different strategies are needed during different years. For example, a family with a student beginning college in fall of 2020 might reduce pre-tax retirement contributions this year (to increase taxes, which are deducted from income on the FAFSA and therefore reduce EFC) and then maximize contributions beginning in 2021 to reduce AGI for AOTC claiming purposes.

 

 

529s and Private High School Tuition

The recent tax bill that went into effect this year included a change allowing parents to use up to $10,000 annually from a 529 account to pay for private high school expenses. Parents considering taking advantage of this provision should weigh another consideration besides whether or not they have saved enough in their 529 to pay for high school in addition to college: Does your state offer the same benefit? Continue reading 529s and Private High School Tuition