education

College Students: The Gray Area of Exemptions

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

There’s still time to take advantage of last-minute, tax-saving moves for dependency exemptions. For 2014, there are bigger dependency exemptions, as well as rules that, in some cases, are dauntingly complex. Read the below article by Julian Block from Accounting Web!

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The 2014 exemption is worth $3,950, up from the 2013 figure of $3,900. But you can’t take an exemption for an individual who is eligible to be claimed as a dependent on someone else’s return. An example: No exemption for a child on the child’s return when he or she can be claimed on the parent’s return.

The basic rules haven’t changed: To claim a 2014 exemption for a dependent, you must furnish more than half of the dependent’s total support for the year or, under a multiple support agreement, more than 10 percent. Generally, the exemption is lost if a dependent’s reportable income for 2014 surpasses $3,950. However, only income from taxable sources counts. Funds received by a dependent from tax-exempt sources like Social Security benefits, inheritances and gifts don’t count.

But there’s a break: Assuming you meet the support test, the tax code sets no limit on the amount of a dependent’s reportable income when your child is either (1) under age 19 at the close of 2014 or (2) a full-time college student who spends at least five months of the year in school and won’t reach the age of 24 by the close of 2014. Note, though, that the income cap does apply when your college-attending child has income above $3,950 and will be 24 by 2014′s close.

Some strategies. Are you supporting a son or daughter in college? In some cases, you need to remind your child to bank part of his or her earnings or to spend some money on nonsupport items; meanwhile, you take care of support items like food, lodgings, clothing, education, medical and dental care, recreation, transportation and similar necessities. Why? Because that maneuver might enable you to pass the support test and get the exemption for 2014.

Count as support the “fair rental value” of the lodgings you provide for a child living with you; add a reasonable allowance for use of telephone, electricity, furnishings, appliances and the like. “Fair rental value,” says the IRS, is the amount you could reasonably expect to receive from a stranger for the same kind of lodgings, not the rent or real estate taxes, mortgage interest, an so on, paid by you that’s attributable to the space involved. Also include the value of a year-round room you maintain for an away-at-college child and the food you provide while he or she is at home during a school recess.

Don’t count a scholarship in calculating total support. It makes no difference that your child actually uses the award for education and other support items. As for GI Bill benefits and the proceeds from college loans secured by the student, they are support the child provides. But any loan for a child’s education secured by you is support you furnish.

The IRS strictly defines “student.” Your son or daughter must be enrolled on a full-time basis for a minimum of five months in the calendar year in an educational institution with a regular faculty, an established curriculum, and an organized student body.

The IRS authorizes no exceptions to the five-month rule. But your child doesn’t have to be enrolled for five consecutive months or even five full months.

An example: Clarice Lecter registers for a full-time course load in January, with classes to run from February through May. With that time span, Clarice satisfies the time requirement, provided she completes the semester.

The IRS allows her to include some night attendance as part of a full-time course of study. But the agency cautions that if Clarice attends exclusively at night, she must enroll for the number of hours or classes that’s considered full-time attendance.

Just how inflexible the agency is on the time stipulation is underscored by an IRS ruling that was sought by the parents of a 19-year-old student who dropped out of school after four months following hospitalization for a nervous breakdown. He was unable to return to school for the remainder of the year. The verdict: No exception from the five-month requirement, regardless of the son’s reason for leaving school. Consequently, the parents couldn’t claim an exemption for him.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

Education Expenses FAQs

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm receives regarding education expenses. Get to know these important financial tips to save as much as possible!
 Are there available tax breaks for my children’s education?

There are many different ways to use tax breaks for the higher education of your children. Be aware that you can only receive one type of relief for one item. It is best to consult with a professional to determine which would be the most advantageous.

▼ What is the education tax credit?

You must make a choice between two types of tax education credit.

▼ What is a Coverdell (Section 530)?

An education IRA is different than a standard IRA in these ways:

  • Withdrawals aren’t taxed if used for qualified education expenses.
  • Contributions can be made only up until the point that the client reaches 18, and all funds must be distributed by the time that they are 30.
  • Contributions are not tax deductible
 How can I best use the Coverdell (section 530)?

It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.

Education expenses from scarsdale cpa

Get to know the expenses that come with education to save as much as possible!

The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.

▼ What is a qualified tuition program?

The Section 529 is a college savings program available in most states. Money is invested to cover the costs of future education. These investments grow tax free and the distributions may also be tax-free.

▼ What differentiates the Coverdell Section 530 and the Section 529?

  • The Section 529 allows for much larger yearly investments, whereas the Section 530 currently only allows for $2000 annually.
  • The choice of investments in the Section 529 is extremely conservative and limited while the Section 530 allows for many different options.
  • The Section 530 is a nationwide program while the 529 varies from state to state.
  • The Section 530 will let you use its funds for primary and secondary education, while the Section 529 can only be used for secondary.
▼ Can I take money from my traditional or Roth IRA to fund my child’s education?

Yes, you can take distributions from your IRAs for qualifying education expenses without having to pay the 10% additional tax penalty. You may owe income tax on at least part of the amount distributed, but not the additional penalty. The amount of the distribution that is more than the education expense does not qualify for the 10% tax exception.

▼ What tax deductions can be used for college education?

There is a limited deduction allowed for higher education and related expenses. In addition, business expense deductions are allowed, without a dollar limit, for education related to the taxpayer’s business, employment included.

▼ Is student loan interest tax deductible?

In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.

  • The deduction ceiling is $2,500.
  • If you are a dependant, you may not claim the interest deduction.
  • You need to be the person liable for the debt and the loan must be purely for education.
▼ Can I deduct for education that helps at the workplace?

If you are receiving this education to maintain or improve skills at your current job, yes, but not if it is to meet the minimum requirements.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Pound Ridge NY, Scarsdale NY, Rye NY, Mamaroneck NY, Stamford CT and beyond.

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Taxes on College Savings Accounts

Scarsdale accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

In recent years, parents have lent an ear to a similar tune: Take the reins of any and every type of tax-advantaged savings account in order to save for your children’s enormous college bills. The message has resonated very clear. A majority of families are now saving for college using on average two types of college savings vehicles. Almost 16% of households are using three. College Savings and Taxes Tips from Scarsdale AccountantOften, this mix includes the more traditional accounts, such as Uniform Gifts to Minors Act (UGMA), as well as tax-deferred education programs like 529 Savings Plans and Coverdell Education Savings Accounts (ESAs). Alternatively, other households are investing in a combination of aforementioned tax-advantaged plans, and taxable brokerage accounts.

There is a scary measure to this story: After spending several years trying to decipher UGMAs, ESAs, IRAs, and 529s to figure out the best path, parents face the equally confusing task of determining how to properly utilize these accounts under the tax code when their child is ready for college. Even for those parents with consolidated accounts, determining how to distribute these savings is not cut and dry. The decision could dictate financial aid grants, as well as affect the household’s tax rate.

Aid considerations are a big reason that planners suggest that parents holding traditional custodial accounts like UGMAs deplete those first to pay for initial college costs. The reasoning is that money saved in a custodial account is held in the child’s name to take advantage of his/her lower tax bracket. Furthermore, anything held in a child’s name considered “for college money” as opposed to monies held by parents (35 percent of the student’s assets are considered “tuition eligible” while only 5.6 percent of the parental assets are considered).

This is just one area in which choosing the correct 529 plan can diminish your tax liability. Please contact our Westchester CPA firm with any further questions about your secondary education questions and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.