And Tax Favored Tuition Relief!
Virginia 529 Planning
The Virginia College Savings Plan (VA529) is a prepaid tuition program to help families of the Commonwealth prepare for higher education in an affordable manner. It is administered by an independent Virginia agency and offers a choice of four flexible and affordable programs…each with both federal and Virginia tax advantages. Three of the four programs are available to residents of any state which opens the door for contributions from out-of-state relatives or others.
Earnings on VA529 accounts grow federal and state tax–deferred and are excluded for income tax purposes when used for qualified higher education expenses. You pay no income tax as your contributions grow and no income tax when you use the funds for the beneficiary’s qualified higher education expenses.
VA529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carry-forward to future tax years. That means a $4,000 Virginia tax deduction for each child, each year which will never be lost even if the full amount is not contributed year-to-year. (Of course, there are certain restrictions.)
If you are at least age 70, you may deduct the entire amount contributed to a VA529 account in one year, so no $4,000 limit. There are also gift tax free provisions that offer additional motivation to contribute to the future higher education financial needs of a child.
Note: Anyone may contribute to your VA529 account. Plus, accounts are not limited to use solely at Virginia educational institutions. Any Eligible Educational Institution around the U.S. or globally may qualify – public or private.
There is considerable flexibility in the individual or entity that may become a VA529 account owner. Account owners must be 18 years of age or older and a U.S. citizen or legal U.S. resident to open an account. The beneficiary must be a U.S. citizen or legal U.S. resident. The account owner may also be a U.S. trust, corporation, partnership, nonprofit organization, custodian, guardian, or other entity.
Note: In this issue of the Blair Bulletin, the American Opportunity Tax Credit (AOC) is discussed. You cannot claim AOC credits based on expenses used to calculate the tax-free portion of a distribution from a VA529. For example, if you take $4,000 from a VA529 to pay for tuition, you may not also claim that amount as an AOC credit.
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American Opportunity Tax Credit
American Opportunity Credit (AOC) … An IRS “Scholarship”
OK. The IRS doesn’t really award scholarships, but the regs do provide the potential for you to enjoy significant reimbursement for education expenses in the form of tax credits. So let’s start with a brief lesson on “What are tax credits?”
The best way to describe tax credits is in contrast to what most taxpayers understand … tax deductions. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.
In the case of the AOC, you may be able to claim a credit of up to $2,500 for education expenses you paid for each student who qualifies for the AOC.
Here’s a brief rundown to determine your qualifications and potential tax-reduction payoffs.
The basic qualifying requirements are:
• The student is yourself, your spouse or a person claimed as a dependent on your return.
• You pay the education expenses for a student enrolled in qualified, higher education.
Forty percent of the American opportunity credit may be refundable. So if the refundable portion of your credit is more than your tax, the excess will be refunded to you.
There are limitations on the amount of your income and the amount of your tax owed. Here’s an overview of those requirements and others.
Table 2-1: Overview of the American Opportunity Credit for 2016
|Maximum credit||Up to $2,500 credit per eligible student|
|Limit on modified adjusted gross income (MAGI)||$180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er)|
|Refundable or nonrefundable||40% of credit may be refundable; the rest is nonrefundable|
|Number of years of postsecondary education||Available ONLY if the student had not completed the first 4 years of postsecondary education before 2016 (generally, the freshman through senior years, determined by the eligible educational institution, not including academic credit awarded solely because of the student's performance on proficiency examinations)|
|Number of tax years credit available||Available ONLY for 4 tax years per eligible student (including any year(s) Hope scholarship credit was claimed)|
|Type of program required||Student must be pursuing a program leading to a degree or other recognized education credential|
|Number of courses||Student must be enrolled at least half-time for at least one academic period that begins during 2016 (or the first 3 months of 2017 if the qualified expenses were paid in 2016)|
|Felony drug conviction||As of the end of 2016, the student had not been convicted of a felony for possessing or distributing a controlled substance|
|Qualified expenses||Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance|
|Payments for academic periods||Payments made in 2016 for academic periods beginning in 2016 or beginning in the first 3 months of 2017|
Claiming the credit
Students typically receive a Form 1098-T Tuition Statement, from their school by January 31.
Note: Your tax preparer will likely request a copy of your completed Form 1098-T to demonstrate due diligence in preparing your tax return if so requested by the IRS.
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