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Back-to-school savings include tax breaks

4 min read

4 min read

August 01, 2012

Considering the confusion surrounding diminishing tax breaks and tax-free ways to pay for school, H&R Block (NYSE: HRB) shares how parents and students can make smart tax and saving choices for education expenses. Some of the most commonly overlooked tax breaks are for education.

With 6 in 10 parents planning to spend an average of $218 on electronics this back-to-school season1, it looks like computer tablets are joining paper tablets on school supply shopping lists. With this increase in spending, many will need to find ways to save money, and one place to start is with tax breaks.

“Aside from catching a sale on school supplies and shopping on sales tax holidays, saving on education costs takes some knowledge and planning,” said Kathy Pickering, executive director of The Tax Institute at H&R Block. “Education savings accounts can be set up now to fulfill a variety of needs in the years to come. Taxpayers also should start saving paperwork and receipts now that serves as documentation for education tax credits and deductions they claim on their tax return next January.”

Check eligibility for education tax breaks

For some taxpayers, knowing what tax credits and deductions they are entitled to can make the difference between owing taxes and receiving a tax refund. The following are frequently overlooked education tax breaks:

  • American Opportunity Credit– up to $2,500 credit for each of the first four years for each student seeking an undergraduate degree
    • In limited instances, this credit may be available for graduate studies if the student was an undergraduate at the beginning of the tax year
  • Lifetime Learning Credit– up to $2,000 credit for those seeking a college or graduate degree, and those taking classes to improve job skills
    • This credit can only be claimed once per tax return, regardless of the number of students taking courses
  • Student loan interest deduction – up to $2,500 per year can be deducted for interest payments made on a qualified education loan
    • Married taxpayers are limited to a $2,500 deduction.

Among the tax laws that expired in 2011 is the Tuition and Fees Deduction. If it is extended for tax year 2012, eligible taxpayers will be able to deduct up to $4,000 (not itemized) from income for high school and college students taking college or graduate courses.

Start saving now for tuition and supplies

Following are some popular ways to save for education and get tax benefits, such as tax-free distributions when used only on education expenses:

  • Coverdell Education Savings Account– use for enrollment and attendance expenses for kindergarten through graduate school, including tuition, books, computers, and room and board
    • Contributions are not tax-deductible, but the earnings grow tax-free when the proceeds are used to pay qualifying expenses
  • 529 Plans – earnings grow tax-free when the proceeds are used to pay qualifying expenses and can be used for higher education expenses, such as tuition, books and fees
  • IRAs– use for education expenses for self, spouse, child or grandchild and there is no 10-percent penalty for early withdrawal
    • The taxpayer will have to pay taxes on traditional IRA withdrawals
    • Roth IRA distributions may be tax-free, unlike with a traditional IRA
  • Education savings bonds – use proceeds to pay education expenses for self, spouse or dependents
    • To exclude the interest from income, the bond must be issued to an individual who is 24 or older.

Understand tax implications of scholarships

Saving for college and taking out loans are common ways to pay for education. For some, scholarships pay all or part of their expenses.

Generally, scholarship, grant and fellowship money is tax-free if a degree-seeking student uses the money to pay for expenses, such as tuition, fees and required textbooks. Scholarship income awarded specifically for room and board is not tax-exempt. Additionally, any scholarship or grant money paid as compensation for services rendered is considered wage income and is fully taxable.

For more information about education tax breaks, contact an H&R Block tax professional. To find the nearest H&R Block office, visit www.hrblock.comor call 800-HRBLOCK.

Many states are holding sales tax-free days prior to the start of the fall school semester. This is another great way to save.

H&R Block, with 4,000 offices open year-round, At Home ® online and the all-new, face-to-face web solution Block LiveSM, offers taxpayers multiple options to meet their filing obligations. Taxpayers can call 800-HRBLOCK for more information or visit www.hrblock.com to find an office near them, or start their return online.

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About H&R Block

H&R Block, Inc. (NYSE: HRB) is the world’s largest tax services provider, having prepared more than 600 million tax returns worldwide since 1955. In fiscal 2012, H&R Block had annual revenues of $2.9 billion and prepared 25.6 million tax returns worldwide. Tax return preparation services are provided in company-owned and franchise retail tax offices by nearly 100,000 professional tax preparers, and through H&R Block At Home™ digital products. H&R Block Bank provides affordable banking products and services. For more information, visit the H&R Block Online Press Center.

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