This is the fifth part of our multi-part series of blogs on tax benefits for education. Any present or former student should utilize the knowledge, experience and expertise of the tax professionals at the Thorgood Law Firm to ensure that they take advantage of all the credits and deductions that the law allows for students of higher education.
Savings Plans
Qualified Tuition Programs (529 plans)
A Qualified Tuition Plan (QTP), also called a 529 Plan, is a program established to allow prospective students to either prepay or contribute to an account established for paying a student’s qualified education expenses at a post secondary institution. States and eligible educational institutions are entities that may establish and maintain programs that allow a student taxpayer to prepay these qualified education expenses.
If tuition is prepaid, the student or designated beneficiary will be entitled to a waiver or a payment of qualified education expenses. Payments or contributions to a QTP are themselves not deductible. However, the benefit of a QTP is that no tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses, which include required tuition and fees, books, supplies and equipment. The latter also includes computer equipment, software and internet access if used primarily by the student while enrolled at an eligible education institution. A taxpayer does not necessarily have to be a full-time student for expenses of room and board to qualify as an expense.
Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) may not only be used to pay qualified higher education expenses but also to pay qualified elementary and secondary education expenses. A beneficiary is defined as an individual under the age of 18, or one with special needs. Income limits apply as the total contributions for a beneficiary of this type of account may not be more than $2,000 in any year, regardless of the number of ESAs that have been opened by the taxpayer.
Like QTPs, contributions to a Coverdell ESA are not deductible, however, the amounts deposited in the account are untaxed until distribution. A student-beneficiary will owe no tax on the distributions as long as they are less than a beneficiary’s qualified education expenses at an eligible institution. Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. If the distribution exceeds qualified education expenses, it typically will subject the student-beneficiary to an additional 10% tax, unless covered by an exception, examples of which include the death or disability of the beneficiary or the beneficiary receiving a qualified scholarship.
If you or a relative are currently enrolled in college and have questions about education credits and deductions, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
