[IMGCAP(1)]Now that it’s springtime and the birds are chirping, it’s important for your tax clients to consider education-related expenses when applying for federal financial aid.
Education tax benefits are an often-overlooked component that can have a significant impact, unless your clients like to give away money. In which case, stop reading.
If your clients or their children were enrolled in higher education or paid interest on a student loan, here’s a rundown of some common education-related tax benefits. This is not tax advice, nor is it an exhaustive list, so visit www.irs.gov for details.
Education Tax Credits: There are two education tax credits that can reduce the amount of tax owed: the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits may be available if your client or their dependent paid for qualified education expenses.
Education Tax Deductions: There are several types of education expenses that can be deducted, reducing the amount of income subject to tax. Some examples of qualified expenses include tuition, fees, student loan interest and books. One cannot claim the tuition and fees deduction and an education credit for the same expense, so choose wisely.
Savings Plans: Distributions from a Qualified Tuition Program (529 plan) may be treated differently for tax purposes, if used for qualified education expenses.
Scholarships/Fellowships: Scholarships or fellowships may be tax-free, if certain conditions are met, and the funds were used to pay for qualified education expenses.
State Taxes: Many states allow deductions for contributions made to the state’s 529 plan. Some states may also offer education tax benefits for qualified education expenses. It’s important to research your client’s state in detail, since this information is not as widely publicized as federal benefits.
What Does the F Stand For?
Spring is also a good time to apply (or re-apply) for federal student aid. This is accomplished with the Free Application for Federal Student Aid (FAFSA). If your clients or your clients’ children are thinking about enrolling in college, they should consider applying. The application is free, straightforward, and…wait for it. Free.
It’s important to know that the FAFSA is used to determine eligibility for more than just need-based financial aid. It’s usually a good idea to apply even if you assume you won’t qualify for grants based upon your income. Other federal programs, such as work-study and student loans, rely upon the FAFSA as well. Additionally, states and schools may use FAFSA information for their respective programs.
There’s enough information floating around the web about the FAFSA to build a bonfire, but don’t be intimidated. Today’s online version is quite intuitive. Features like “Help and Hints,” skip-logic, and the IRS Data Retrieval Tool, enabling data to be transferred directly from the IRS, have made it more convenient. Visit www.fafsa.gov.
Income and tax questions are based on the prior-year, so 2015 information will be used on the 2016-2017 FAFSA.
Also, there’s no need for tax filers to wait until they’ve filed their taxes to complete the FAFSA. Use estimated information based on the previous year. This is key because some financial aid is first come, first served, and several states have application deadlines. Just remember to update the information once your 2015 income and tax information is available.
On the Horizon
Everything you just read about the FAFSA pertains to the upcoming 2016-2017 school year. Here is your heads-up on two significant changes coming for the 2017-2018 cycle.
Mark your calendar for Oct. 1, 2016, the date the 2017-2018 FAFSA will become available. This is earlier than past years’ date, which has traditionally been January 1.
Secondly, the 2017-2018 FAFSA will utilize income and tax information from two years prior, rather than the previous year. 2015 income and tax information will be used two years in a row—now for the 2016-2017 school year and again for the 2017-2018 school year.
The last piece of advice for clients is to follow their school, the Education Department, and their state’s education agencies on social media and websites. Application deadlines, funding, and key information can change throughout the year, so it’s important to stay in the loop.
Now you know what birds, taxes, and FAFSA all have in common, and why we’re so enthusiastic about spring.
Marcus Szymanoski is the manager of training and communication at DeVry Education Group’s regulatory affairs division. He can be contacted at email@example.com. Federal Student Aid Logo, FAFSA, and FAFSA4caster are trademarks of the U.S. Department of Education.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access