Back to School Tax Breaks

With the fall term just around the corner, students and their families are getting ready for school. They are buying clothing, books, and computers. Payments are being made for tuition and fees. Can Uncle Sam help you defray the cost of school? Yes!

Sales tax breaks

While you can’t deduct the cost of clothing, backpacks, and tablets, you may catch a break on sales tax for certain items. Many states have sales tax holidays, usually in early August, on clothing, school supplies, and computers for a limited time. You can find information about a sales tax holiday in your state—when it runs, what it applies to, and links to your state for more information—from the Federation of Tax Administrators.

Tax write-offs

Payment for tuition and fees may entitle you to a deduction or tax credit. You can claim only one tax break for the qualified costs you pay, so choose the one that provides you with the greatest tax savings. If you prepare your return with software or an online program, the program will help you make the wisest choice. Similarly, if you use a paid preparer, he or she will guide you in making the best choice. Each tax break has different income limits, so you may not qualify for all or even any of them. Here are your potential write-offs:

• Tuition and fees deduction. This deduction applies for tuition and fees. The deduction is up to $4,000 from gross income, so you don’t have to itemize other deductions to be able to take it. Technically, the deduction expired at the end of 2011, but it is expected to be extended for 2012.
• American opportunity credit. This credit applies only for qualified payments for the first 4 years of higher education. The credit limit is $2,500, 40% of which is refundable (payable to you even if it exceeds your tax bill).
• Lifetime learning credit. This credit of up to $2,000 applies for qualified payments for higher learning—in college or graduate school.

Tax-free withdrawals for special accounts

There are 2 types of accounts that you can tap to pay tuition and certain other costs. There are no dollar limits on withdrawals. Amounts used to pay qualified expenses are tax free:

• 529 plans. Payments for qualified higher education costs include tuition, books, and even room and board if the student is at least a half-time student.
• Coverdell education savings accounts. Payments for 2012 can be for primary and secondary school as well as higher education. The range of qualified expenses is quite broad; it includes, for example, school uniforms, tutoring, and transportation.

Other tax breaks

There are several other special education-related rules that can provide tax relief. These include:

• Deduction for work-related education. If you take courses to maintain or improve job skills, you can deduct them as a miscellaneous itemized deduction. However, amounts must exceed 2% of adjusted gross income to produce any tax savings; they are not deductible for purposes of the alternative minimum tax.
• Employer-paid education assistance. If your company pays tuition for training courses or any higher education, up to $5,250 is tax free. This treatment applies regardless of your income or whether the courses are job related. For courses that are job-related, there’s no dollar limit on what you can treat as tax free.
• Tax-free scholarships and fellowships. Grants covering tuition and fees for degree candidates in an undergraduate or graduate program are not taxed.
• Tax-free interest on savings bonds. If you redeem U.S. savings bonds to pay for qualified higher education costs and your income is below set limits, the interest is not taxed.
• Penalty-free withdrawals from IRAs. While the 10% early distribution penalty for those under age 59¹/₂ won’t apply, the withdrawals are still taxable.

Conclusion

The cost of education may be high, but there are tax-saving opportunities to help you defray some of your payments. Check which ones apply to you!