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July 26, 2017
It’s that time of year again when kids are starting or going back to college. So naturally there can be lots of questions regarding tax benefits that may or may not be available related to the costs of their education. Here is a brief summary of available options:
Federal Tax Credits/Deductions: When taxpayers qualify, tax credits are the best option, as they are deducted dollar-for-dollar off your total calculated tax. This is different than a tax deduction, which is taken off your taxable income before the tax rate is applied. Here are some general rules that apply to these:
Some of the tax credits that are available for “post-secondary education” include:
a) Up to $4,000 of qualified expense paid for taxpayers with up to $130,000 in modified AGI for joint returns and $65,000 in modified AGI for single/head of household.
b) Up to $2,000 of qualified expenses paid for modified AGI between $130,000 – $160,000 for joint returns and $65,000 – $80,000 in modified AGI for single/head of household.
Illinois Tax Credits/Deductions: Unfortunately, Illinois does not have post-secondary education tax credits available. However, if you qualify for the federal Tuition and Fees Deduction and have taken that on your federal return, then it will also flow through to you on your Illinois return.
Education Savings Options: Qualified 529 College Savings plans and Education Savings Accounts (ESA) provide vehicles to save for post-secondary educational expenses. These do not provide a federal credit, nor a deduction in the year of contribution, but the growth of the investment is tax-free as long as distributions are made for qualified educational expenses. Also, the definition of what is included as a qualified educational expense is broader than that used for the federal tax credits and deduction. If you use a qualified Illinois 529 College Savings plan, then you are allowed a 2017 Illinois deduction for the total contributions made to all plans up to a combined max of $20,000 if married filing jointly, or $10,000 if single. Also, this deduction is allowed even if you do not claim the beneficiary as a dependent on your Illinois return (e.g. if grandparents want to contribute or set up a qualified Illinois 529 Plan for their grandchildren, then they can take a deduction on their Illinois-filed return for their annual contribution).
Summary: As you can see, there are many decisions to make and tax planning options to consider when deciding how to save/pay for college expenses. It is important to know where you stand and what options are best for you and your student in order to maximize you tax benefits. If you have any tax planning questions or want to know more about how these tax options affect your personal situation, contact your tax preparer.
Enjoy the rest of your summer!