Financial Lessons for Back to School

Funding your child’s education is an expensive financial goal that requires careful planning. As you and your children begin a new school year, let’s consider some “financial lessons” that merit your attention regardless of whether instruction will be remote or in-person.

1. Review your qualified education expenses.

You may receive a tax credit or deduction when paying for certain education expenses. These qualified education expenses include tuition; expenses required for enrollment or attendance; student activity fees; expenses for course-related books, supplies and equipment. You may also include the cost of a computer if paid directly to the institution as a requirement for enrollment.

Consider conducting a “back to school” review of your education expenses as part of your financial plan.

2. Use the American Opportunity Tax Credit (AOTC) to offset post-secondary education expenses.

A tax credit reduces the amount of tax that you owe on a dollar-for-dollar basis. The AOTC allows a tax credit of up to $2,500 for the first four years of post-secondary education. In general, qualified education expenses include tuition and required fees for enrollment or attendance. Eligible post-secondary schools include colleges, universities and trade schools. Students must meet certain guidelines, and income limits exist for claiming the tax credit.

3. Claim the Lifetime Learning Credit for ongoing education.

You may be able to claim a tax credit when taking courses to enhance your professional career. The Lifetime Learning Credit allows you to offset 20% of the first $10,000 in tuition expenses, which limits the annual credit to $2,000. Provisions do not limit the number of years. However, the credit does phase out at certain income levels.

4. Review the tuition and fees deduction benefit.

The IRS has extended the tuition and fees deduction to cover qualified education expenses in 2019 and 2020. Education expenses include those paid for yourself, your spouse or your dependents(s). You cannot claim this deduction if filing Married Separately or if another person can claim you as a dependent on his or her tax return. Claiming the tuition and fee deduction may reduce your income subject to tax up to $4,000. This deduction may be beneficial if you don’t qualify for the American Opportunity Credit or the Lifetime Learning Credit. Income phase-outs do apply, and you cannot take the tuition and fee deduction in the same year that you claim one of the education credits.

The IRS’s Interactive Tax Assistant can help you determine if you’re eligible for educational credits or deductions. Also, consider consulting your tax advisor.

5. Set up a 529 Plan to pay for K-12 education expenses.

Since 2018, the Tax Cuts and Jobs Act (TCJA) allows you to withdraw up to $10,000 tax-free to pay for tuition expenses. Your state may also offer an additional tax benefit. However, all states have not consistently complied with the TCJA. Consider reviewing your planning options with your tax advisor.

An individual can contribute $15,000 per year to a 529 Plan, which qualifies for the annual gift exclusion. Or you can contribute $75,000 as a lump sum contribution over five years. Couples can make a one-time contribution of $150,000 over the same period.

Withdrawals are tax-free when used to cover qualified education expenses. Room and board are also included.

6. Use a dependent care Flex Spending Account to cover day care expenses.

As part of their employee benefits, married couples may contribute up to $5,000 ($2,500 if single) in pre-tax dollars to a dependent care Flex Spending Account to cover expenses for child(ren) under the age of 13. Expenses may include:

• In-home care, such as a nanny
• Summer day camps
• Pre-school and after-school care
• Transportation provided by the caregiver
• Application fees or deposits required for the service

Depending on your income, you may benefit from taking the Child and Dependent Care Tax Credit rather than paying your expenses from the dependent care FSA. Using the Pay Flex Savings Calculator can help you determine which option is most advantageous. Also, consider consulting your tax advisor.

7. Review other tax benefits with your tax advisor.

As part of your “back to school” review, you may be able to take advantage of some additional tax benefits. Consider reviewing the following provisions:

• Deduct student loan interest
• Receive tax-free treatment of a canceled student loan
• Receive tax-free student loan repayment assistance
• Establish and contribute to a Coverdell education savings account (ESA), which features tax-free earnings
• Use qualified tuition programs (529 plans) to pay for college expenses
• Take early distributions from any type of individual retirement account (IRA) for education costs without paying the 10% additional tax on early distributions
• Cash in savings bonds for education costs without having to pay tax on the interest
• Receive tax-free education benefits from your employer
• Claim a business deduction for work-related education

As you embark upon a new school year, consider incorporating these “financial lessons” as guidelines for your education planning. A CERTIFIED FINANCIAL PLANNER™ professional can help you determine which options are the best fit for your financial position.

Disclosure: Registered Representative of and Securities and Investment Advisory Services offered through Cetera Advisor Networks, LLC. Registered Broker Dealer, Member FINRA/SIPC. Reid Financial Consulting, Inc. and Cetera Advisor Networks are unaffiliated. Although the information is based on reliable sources, the recommendations have limitations. Consult your tax advisor and financial planner for more specific advice.