We at College Connectors are not financial advisers, or accountants, but we know some folks who are. Here are some tax return pointers you may be interested in as they apply to college related topics hot off the press from the Minnesota Society of Certified Public Accountants.
College and Taxes: MNCPA Outlines the Importance of Determining
Who Takes the Dependency Deduction — Parent or Student
If a member of your household is a college student or returned to school for additional training in the past year, there are important tax considerations to discuss with your CPA as you organize your state and federal income tax return information for 2012, advises the Minnesota Society of Certified Public Accountants (MNCPA).
One important tax planning decision relates to the dependency deduction. Students who file a tax return might incorrectly claim their own personal exemption, which denies a parent or guardian from taking the deduction for their dependent child. But talking to the student prior to tax season and meeting with a CPA can help you determine who is entitled to the deduction.
Who can claim the deduction for the student is based on the tax code’s tests of age, residency, relationship and the level of financial support the student receives. “The support test is often the deciding factor. Who qualifies as providing most of the support can be especially complicated when college savings plans, loans, scholarships, military benefits or gifting are part of the equation,” notes CPA Steve Warren with Lehrman, Flom & Co. CPAs in Minneapolis.
The IRS will only accept one return with the personal exemption deduction for a specific individual and that will normally be the first filed return. Therefore, the parent could lose the deduction advantages along with any related tax benefits if the child incorrectly claims it first. In addition, the processing of the parent’s return will be delayed if the deduction for the child’s exemption is attempted a second time. The parent also could be audited and/or face an assessment for more tax, penalties and interest. If the student claims a deduction he or she is not entitled to (whether it relates to the dependency exemption or anything else), then an amended return is required, Warren explains. “Any parent with a child who prepares his or her own tax returns will be well advised to either explain to the child what tax benefits he or she is entitled to if the parent knows or meet with a CPA to learn the best way to prepare the returns,” he says.
Besides the dependency deduction, there are other college related tax benefits that will be reinstated through 2013 in The American Taxpayer Relief Act of 2012 passed on January 1, 2013. They include:
American Opportunity Tax Credit — You may be able to claim a credit of as much as $2,500 for qualified tuition and related expenses for each eligible student on your federal individual income tax return. This credit is partially refundable (40 percent), which means you could claim the credit and get a refund even if you do not owe taxes.
Lifetime Learning Tax Credit — You may be able to claim a credit of as much as $2,000 for qualified tuition and related expenses per tax return. This credit is nonrefundable. .
Student Loan Interest Deduction — You may be able to deduct as much as $2,500 of the interest you paid on student loans on your federal individual income tax return.
Tuition and Fees Deduction — You may qualify to deduct as much as $4,000 in qualified tuition and related expenses even if you do not itemize deductions on Schedule A, Form 1040. This deduction may be beneficial to you if you cannot take either the American Opportunity or Lifetime Learning Tax Credit.
Accountants can help with these financial questions about tax returns. As Independent Educational Consultants, we help with the other important tasks related to college admissions, the college search and application processes. Contact College Connectors for non-tax related college search, admissions and application questions.