Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

November 9, 2012
Which education tax break is best?

Q: We have about $6K in a 529 for our daughter's college expenses. Now that she is a freshman, we have incurred a few expenses: $1,200 laptop, $700 payment and books. My question is this: Is it better to withdraw the funds from our 529, or use the education credit on our federal tax return? I know I can't use both and I'm not clear about the education credit options. Reading the IRS site, it appears you can't use the American
Opportunity for room and board. She did receive the CSU Cal grant of approx. $3K per semester, a $1,000 Pell Grant, and a $1,000 scholarship. I don't want to make a withdrawal from the 529 until I'm sure that I'm unable to use the credit.

Susan
Roseville

A: There is no simple answer to questions regarding which education incentive is best to use because there are so many variables involved. The IRS publication explaining the Tax Benefits for Education, Publication 970, is 87 pages long!

The following comments are intended to be general guidance. You should talk to your tax advisor regarding your specific situation.

In general, the American Opportunity Credit is the most favorable, as 40% of the credit is refundable. That means that if your deductions and other nonrefundable credits reduce your tax to zero, you will get back the refundable portion of the credit.

The maximum credit is $2,500 per student, of which up to $1,000 can be refunded to you. There is an income limit. If you are filing a joint income tax return with your spouse, your income has to be below $180,000 ($90,000 if you are single or head of household). You cannot claim the credit if you are married filing a separate return, regardless of income level.

Expenses that qualify for the credit include tuition and certain expenses paid to an eligible educational institution (college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education). Expenses for books, supplies and equipment needed for a course of study are included in qualified education expenses. Room and board are not.

Qualifying education expense must be reduced by tax-free educational assistance, such as scholarships, grants or assistance provided by an employer. The American Opportunity Credit is only available for the first 4 years of postsecondary education. See page 10 of Publication 970 for a flowchart that you can use to determine whether you qualify for the American Opportunity Credit, as there are other requirements.

If your income is over the above mentioned limit or if your expenditures include room and board, it may be better to use funds from a 529 account. The earnings portion of the funds withdrawn to pay for qualified educational expenses of the designated beneficiary of the account, including room and board, are not taxable. There is no income limit affecting this tax break.

You can claim and American Opportunity Credit and take tax free distributions from a 529 plan in the same year to the extent that expenses qualifying for 529 distributions do not qualify for the American Opportunity Credit. So you can pay qualifying room and board expenses from 529 distributions and claim the American Opportunity Credit for qualifying tuition and fee expenses.

There is also a Lifetime Learning Credit. You cannot claim the American Opportunity Credit and the Lifetime Learning credit for the same eligible student in the same tax year. The Lifetime Learning Credit is limited to $2,000 per year and is nonrefundable. The income limits are lower: $122,000 married filing joint, $61,000 single/head of household. Married taxpayers filing separate returns do not qualify for this credit. It is available for an unlimited number of years. Qualifying expenses are similar to the American Opportunity Credit.

Most tax preparation software has an education tax break maximization feature. Once the raw data is input, the software will determine which education tax incentive is the best. The choice of incentive may change from year to year depending on your specific circumstances.


About Comments

Reader comments on Sacbee.com are the opinions of the writer, not The Sacramento Bee. If you see an objectionable comment, click the "report abuse" button below it. We will delete comments containing inappropriate links, obscenities, hate speech, and personal attacks. Flagrant or repeat violators will be banned. See more about comments here.

What You Should Know About Comments on Sacbee.com

Sacbee.com is happy to provide a forum for reader interaction, discussion, feedback and reaction to our stories. However, we reserve the right to delete inappropriate comments or ban users who can't play nice. (See our full terms of service here.)

Here are some rules of the road:

• Keep your comments civil. Don't insult one another or the subjects of our articles. If you think a comment violates our guidelines click the "report abuse" button to notify the moderators. Responding to the comment will only encourage bad behavior.

• Don't use profanities, vulgarities or hate speech. This is a general interest news site. Sometimes, there are children present. Don't say anything in a way you wouldn't want your own child to hear.

• Do not attack other users; focus your comments on issues, not individuals.

• Stay on topic. Only post comments relevant to the article at hand. If you want to discuss an issue with a specific user, click on his profile name and send him a direct message.

• Do not copy and paste outside material into the comment box.

• Don't repeat the same comment over and over. We heard you the first time.

• Do not use the commenting system for advertising. That's spam and it isn't allowed.

• Don't use all capital letters. That's akin to yelling and not appreciated by the audience.

You should also know that The Sacramento Bee does not screen comments before they are posted. You are more likely to see inappropriate comments before our staff does, so we ask that you click the "report abuse" button to submit those comments for moderator review. You also may notify us via email at feedback@sacbee.com. Note the headline on which the comment is made and tell us the profile name of the user who made the comment. Remember, comment moderation is subjective. You may find some material objectionable that we won't and vice versa.

If you submit a comment, the user name of your account will appear along with it. Users cannot remove their own comments once they have submitted them, but you may ask our staff to retract one of your comments by sending an email to feedback@sacbee.com. Again, make sure you note the headline on which the comment is made and tell us your profile name.

hide comments

On October 14, The Sacramento Bee will temporarily remove commenting from sacbee.com. While we design the upgrade, we encourage you to tell us what you like and don't like about commenting on sacbee.com and other websites. We've heard from hundreds of you already and we're listening. Please continue to add your thoughts and questions here. We also encourage you to write Letters to the Editor on this and other topics.



FOLLOW US | Get more from sacbee.com | Follow us on Twitter | Become a fan on Facebook | Get news in your inbox | View our mobile versions | e-edition: Print edition online | What our bloggers are saying

Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



October 2013

Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31