While certain tax credits and deductions can help lessen the impact of paying for college, the IRS can be a little picky about the documentation it requires to substantiate those claims. You certainly want to claim all the deductions you can, but you don’t want to raise any potential red flags. Read on for a few steps parents, or students paying their own way, can take to ensure their tax forms are filled out properly.
Record Money You Receive
If a student received money to pay for college expenses, whether in the form of a scholarship, grant, or withdrawals from a 529 plan, you’ll need to record these correctly on your federal income tax return. To help you, you’ll receive forms from various entities involved. For example, the college will send the tuition-paying student (or the parent, if the student is a dependent) a 1098-T, which will detail the amount of tuition, grant, and scholarship assistance the student has received. Students (or their parents) who have made withdrawals from a 529 investment, prepaid plan, or a Coverdell Education Savings Account may receive a 1099-Q: Payments From Qualified Education Programs. The form will show you the total amount of distributions for the year (even if it didn’t all go directly to the school). If your student received financial assistance from other sources, such as an employer or the Veterans’ Administration, you’ll need to document that carefully, as well.
Claim the Proper Tax Credits
You may be able to claim a tax break such as the Lifetime Learning Credit or the American Opportunity Tax Credit if you meet qualifications.
Lifetime Learning Credit
The Lifetime Learning Credit can be claimed by the student, the student’s spouse, or the person who claims the student as a dependent. It provides a deduction of up to $2,000 if the student is enrolled at an eligible institution and taking courses toward a degree or to improve job skills. The credit starts phasing out when you have a modified adjusted gross income (MAGI) of $80,000 ($160,000 for joint returns), and it becomes unavailable once your MAGI reaches $90,000 ($180,000 for joint returns).
American Opportunity Tax Credit
The American Opportunity Tax Credit is a credit of up to $2,500 toward expenses for eligible students in the first four years of earning a degree. If your credit pays your taxes down to zero, you also can get a refund of up to $1,000 of the remaining credit. To claim the credit, your MAGI must be $80,000 or less ($160,000 if married filing jointly), with an adjusted amount for filers with a MAGI of up to $90,000 ($180,000 if married filing jointly).
Deduct Qualified Education Expenses
Withdrawals from 529 plans must go toward qualified educational expenses. If you made withdrawals or want to claim a deduction, you will need to know what expenses count as qualified education expenses to the IRS. In general, qualifying expenses include the normal costs of enrollment and attendance. These could include:
TuitionRequired feesCourse-related expenses such as books and supplies
Expenses that usually do not qualify include:
Room and boardTransportationStudent health insurance and medical expensesStudent fees (unless they are required as a condition of enrollment or attendance)
Keep Supporting Documentation
The best way to survive an audit, if you are ever selected for one, is to be able to provide documentation for everything. Receipts and other documents help you prove that the money was spent on qualified educational expenses. Maintain copies of all receipts or canceled checks and have copies of class transcripts on hand, as well, to show that your student completed specific courses. Keep copies of each course syllabus so that you can justify purchasing required books or materials, and keep receipts for those purchases. If you paid out of pocket for computer equipment, internet access, or other types of technology, that should also be the documentation you keep filed with the rest of your tax documents.
Fill Out Your Return Carefully
Don’t speed through the education portions of your tax return. Take your time, transfer numbers carefully from your 1098s and 1099s, and check your math twice. You don’t want a simple error to result in an audit. Tax preparation software can help you with your calculations, and it may even provide an additional math guarantee. If you received a refund from the college, be sure to subtract that from any amounts you are claiming.
Get Help If Needed
Preparing your taxes while you or your dependent is in school can be confusing, and it might be advisable to work with a tax preparation professional. The amount you invest in having someone else make sure your tax returns are completed correctly could be well worth it if you don’t have to deal with the stress of an IRS audit. On the other hand, if you have eligible education spending and qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit, it may lower your tax liability enough for a refund. And the American Opportunity Tax Credit is partially refundable, so if the credit reduces your tax liability past zero, you can get the remainder refunded to you (up to $1,000).
