As students head to campuses to begin their fall semesters, now is the time to educate the whole family on tax planning strategies for the next four-plus years. Whether you need education-related tax credits or tips to maximize your students’ financial aid eligibility, Neely’s Accounting Services can help both students and families ace this financial test.
Getting Started: The FAFSA
You’ll hear a lot about the Free Application for Federal Student Aid — commonly called the FAFSA. This is what colleges and universities use to determine if a student qualifies for federal financial aid or any of the school’s scholarships and aid programs. Families must fill out the FAFSA each year, but it’s the first year that really sets the foundation for a student’s financial aid package.
Here are a few tips to maximize your eligibility for financial aid:
- Even if you think your family won’t qualify, file a FAFSA. In reality, most families do qualify for some financial aid, and you’ll be eligible for school-specific, need- and merit-based scholarships and grants as well. Plus, you’ll be prepared in the event your financial situation unexpectedly changes before the start of the academic year.
- Submit your FAFSA as soon as possible after it’s available Oct. 1 to give your student the best shot at federal aid and grant programs that are award funds on a first-come, first-served basis.
- Keep your family’s taxable income as low as possible the first year you file without doing the family financial harm. Small, thoughtful tweaks can make a difference, such as delaying the sale of stocks or bonds, avoiding early withdrawals from retirement savings and asking employers to defer a bonus to another tax year.
Is Your Student Still a Dependent?
Families should figure out whether their student will be considered a dependent during college. Parents can claim a full-time college student as a dependent until age 24 if they are proving more than half of the student’s support. Most college students fall into this category. If a parent does claim a student as a dependent, the student likewise will need to answer “yes” when asked on tax documents if someone else can claim him or her as a dependent.
Take Advantage of Tax Credits
Several federal tax credits are available to help offset the cost of education. Pick the best one that fits your circumstances because they cannot be used in combination.
- The American Opportunity Credit: Qualifying students or their parents may claim up to $2,500 of college expenses — including tuition, fees, books and other requirements — for the first four years of schooling while working toward a degree or certificate.
- The Lifetime Learning Credit: Qualifying students or their parents may claim up $2,000 in education expenses for an unlimited number of years. This would be helpful to a non-degree-seeking student or a graduate student.
- Tuition and Fees Deduction: Qualifying students or their parents can deduct up to $4,000 in education expenses paid directly to the student’s school. Expenses include tuition and related expenses required to be enrolled.
- Student Loan Interest Deduction: After graduation, a student can deduct the interest paid on student loans in the past year. The lender will provide the required interest statement each January.
Military Students and Veterans
Military students or students using a military benefit to pay for schooling should understand that their tax planning will look a little different.
- For students received ROTC stipends for education and living expenses, these payments are not taxable and do not need to be included on your federal tax return.
- Cadets at the federal service academies, however, are considered on “active duty” while at school, so any payments made generally are taxable and should be reported as income on your federal return.
- Funds received from the VA for education, training, or subsistence are not taxable.
Contact Neely’s Accounting for Expert Help
Neely’s Accounting Services can offer some time-tested lessons in tax planning. We’ve supported Roanoke-area individuals and business since 2007 with our big-city services and a hometown feel. Contact us today and let us set yourself up for tax success for your students’ college years.