If you or your child is graduating this year, you’re likely caught up in a swirl of pomp and circumstance. You may be thinking about ordering regalia, planning grad parties, taking senior photos or what the next step in continuing education may be. But graduating comes with some implications for your taxes and finances as well.
One of the biggest ways graduations — either from high school or college — affect your finances is through student loans.
Following high school graduation, you may be looking at taking on student loans to pay for college and other educational expenses. It’s important to consider whether these loans will be in the parent’s name or the student’s name, as this influences who will be responsible for the loan later, as well as who can deduct the interest on their tax return. Some taxpayers may be able to deduct up to $2,500 of interest paid on qualified education loans, but this can depend on factors like your filing status or modified adjusted gross income. It’s a good idea to talk with a tax professional about setting up your student loans correctly for your situation to make the most of tax benefits.
If you or your child is graduating college, you may be faced with the realization that soon you’ll have to pay those loans back. In the past, most federal loans began repayment after a six-month grace period from leaving school. However, with COVID relief measures and loan forgiveness plans, these expectations have become murkier. Check the FSA website for the status of loan forgiveness programs and for details about eligibility. Please be aware that in some states, there may be a tax obligation for forgiven loans. If you’re worried about making those payments, a financial consultant can help you restructure your budget and select the best repayment plan to fit your needs.
If you’re wondering if there are any other tax credits available to help with education costs, the answer is yes, if you’re eligible. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) are two of these available education credits. You may be eligible for these credits if you or your dependent pays qualified education expenses and is enrolled at an eligible educational institution.
Students must have a properly completed Form 1098-T to claim these credits. According to the IRS, schools must provide Form 1098-T to any student who paid “qualified educational expenses” in the preceding tax year. Qualified expenses include tuition, any fees that are required for enrollment, and course materials the student was required to buy from the school. Schools must send the form to the student by January 31 and file a copy with the IRS by February 28. Be on the lookout for this form in the mail and bring it to your tax preparer, so you don’t miss out on this tax-saving opportunity!
Remember that when dependency is involved, it’s important to know who is eligible to claim the credit on their return. Working with a tax professional can help you avoid errors in claiming these credits and help you make the most of available benefits.
Scholarships and Fellowships
School can be expensive, and if you can get them, scholarships are a great way to help pay for education expenses without additional debt!
If the recipient of the scholarship or fellowship funds is considered a degree candidate and uses the funds for approved expenses, such as tuition, books, and equipment, that income is generally not taxable. But be aware that this comes with some additional rules and regulations, and it’s not always easy to know what income is and isn’t taxable. You may want to talk to a tax professional during the year, so you don’t accidentally misrepresent your income when it’s time to file.
Higher education can be a noble pursuit, and a valuable one. But don’t let it become an expensive mistake on your tax return. If you need a professional to help you make the most of your loans, credits and scholarships, Padgett’s nationwide network of CPAs and EAs are ready to lend a hand. Find a location near you today!