When it comes to the dependency deduction on federal income tax returns, college students who file a tax return might incorrectly claim their own personal exemption. This would deny a parent or guardian from taking the deduction for the dependent child. If you or a member of your household is a college student or has returned to school for additional training in the past year, the Pennsylvania Institute of Certified Public Accountants (PICPA) offers the following important tax considerations to discuss with your CPA as you organize your state and federal income tax return information for 2014.
One important tax-planning decision relates to the dependency deduction. Students who file a tax return might incorrectly claim their own personal exemption, which denies a parent or guardian from taking the deduction for their dependent child. But talking to the student prior to tax season and meeting with a CPA can help you determine who is entitled to the deduction.
Who can claim the deduction for the student is based on the tax code’s tests of age, residency, relationship and the level of financial support the student receives. The support test is often the deciding factor. Who qualifies as providing most of the support can be especially complicated when college savings plans, loans, scholarships, military benefits or gifting are part of the equation says the PICPA.
Be sure to talk to the student prior to tax season to make it clear who is entitled to the deduction. The IRS will only accept one return with the personal exemption deduction for a specific individual, and that will normally be the first filed return. Therefore, the parent could lose the exemption deduction advantages, along with any related tax benefits, if the child incorrectly claims it first. In addition, the processing of the parent’s return will be delayed if the deduction for the child’s exemption is attempted a second time. The parent also could be audited, requiring them to provide proof of the dependency deduction and/or face an assessment for more tax, penalties, and interest. If the student claims a deduction to which he or she is not entitled (whether it relates to the dependency exemption or anything else), then an amended return is required.
Other college-related tax benefits include the following:
American Opportunity Tax Credit
— You may be able to claim a credit of as much as $2,500 for qualified tuition and related expenses for each eligible student on your federal individual income tax return. This credit is partially refundable (40 percent) for some taxpayers. This means you might be able to claim the credit and get a refund, even if you do not owe taxes.
Lifetime Learning Tax Credit
— You may be able to claim a credit of as much as $2,000 for qualified tuition and related expenses per tax return. This credit is nonrefundable.
Tuition and Fees Deduction
— You may qualify to deduct as much as $4,000 in qualified tuition and related expenses, even if you do not itemize deductions on Schedule A, Form 1040, if the provision is renewed by Congress
The education credits and tuition and fees deduction have overlapping but different rules. Further, the same expenses cannot be used to gain more than one tax benefit. It can be challenging to determine which tax benefits you are eligible to claim, and which is the best to use for your situation when you are eligible to claim more than one. There is increased talk in Congress about simplifying this area, but no major changes are expected to take effect for use before 2015.
Student Loan Interest Deduction
— You may be able to deduct as much as $2,500 of qualifying interest you paid on student loans if the provision is renewed by Congress
The tuition and fees deduction and student loan interest deduction both expired Dec. 31, 2013, so they are not currently available for 2014 tax returns. Their status is uncertain: Congress could do nothing and they remain expired, or Congress could renew both retroactively with numerous other expired provisions frequently referred to as “tax extenders.”
For more information about taxes or to find a CPA in Pennsylvania by location or area of expertise, visit PICPA’s consumer section