college tax credit - Linkenheimer LLP CPAs & Advisors

Expanded Use of 529 Account Funds

Under pre-Act law, funds in a Code Sec. 529 college savings account could only be used for qualified higher education expenses. If funds were withdrawn from the account for other purposes, each withdrawal was treated as containing a pro-rate portion of earnings and principal. The earnings portion of a non-qualified withdrawal was taxable as ordinary income and subject to a 10% additional tax unless an exception applied.

“Qualified higher education expenses” included tuition, fees, books, supplies, and required equipment, as well as reasonable room and board if the student was enrolled at least half-time. Eligible schools included colleges, universities, vocational schools, or other post-secondary schools eligible to participate in a student aid program of the Department of Education. This included nearly all accredited public, nonprofit, and proprietary (for-profit) post-secondary institutions.

New law. For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. (Code Sec. 529(c) (7), as added by Act Sec. 11032(a))

The IRS recently reminded taxpayers that back-to-school time is a good time to see if they qualify for education-related tax credits. The American Opportunity Credit (AOC) and Lifetime Learning Credit (LLC) are available to taxpayers who pay qualifying expenses for eligible students. The maximum AOC is $2,500 per student, 40% refundable, and available for the first four years of postsecondary education. The LLC is limited to $2,000 per tax return, nonrefundable, and available to both graduate and undergraduate students. Only one credit can be claimed for a particular student in a tax year.