Missing out on legitimate credits and deductions is a common tax mistake for parents of college students.
A recent study by the U.S. Government Accountability Office (GAO) reported that 27% of eligible tax filers failed to take advantage of deductions and credits aimed at parents of students enrolled in higher education. They missed out on an average tax savings of $169.
Picking the right deduction or credit starts with reading IRS (Internal Revenue Service) Publication 970, Tax Benefits for Education, available online at irs.gov.
Hope and Lifetime Credits
The Hope Credit benefits students who are enrolled at least half-time during their first two years of college. Parents can claim a tax credit of up to $1,650 per student.
The Lifetime Learning Credit can be taken throughout the course of the student's higher education, but requires at least $10,000 of eligible expenses each year. Parents are limited to claiming one $2,000 tax credit per return.
Both credits are reduced after parents hit certain income levels, with a maximum adjusted gross income limit of $110,000 for parents filing jointly in 2006.
More smart tax moves
Parents who earn too much to claim Hope and Lifetime credits still may qualify for the tuition and fee deduction. The deduction was reduced from $4,000 to $2,000 after adjusted gross income hit $130,000 in 2006 and eliminated for incomes of more than $160,000.
Other tax moves that can benefit parents include:
* Paying enough expenses out-of-pocket to qualify for deductions or credits before tapping a "529 plan" or a Coverdell account, which allow parents to pay for college expenses with tax-free earnings.
* Continuing to claim a student as a dependent while in college, which can be done until the student reaches age 24 as long as the parents provide at least half of his or her support.
* Claiming deductions for payments made on student loans, as long as the person who took out the loan is the one who makes the loan payment.
Higher education deductions continually are shifting, so always remember to check the latest rules online.
True North also can help with questions about saving and paying for college. Call or visit us today!