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Preparing for your educational future

Josh Mullins

Jun 1, 2023

As the school year comes to an end, there is a new group of high school graduates getting ready to begin the next chapter of their lives by beginning college.

As the school year comes to an end, there is a new group of high school graduates getting ready to begin the next chapter of their lives by beginning college. One part of the college financial puzzle is what options are available from a tax perspective.

Q. Are there any state tax benefits available for college?
A. Oklahoma offers 529 plans. These are college savings accounts that allow taxpayers to contribute to the savings accounts and take a deduction against their Oklahoma adjusted gross income for the amount of the contributions each year. The annual limit of the deduction is $10,000 or $20,000 for taxpayer’s filing jointly. Also, the earnings from the investments are excluded from both federal and state income taxes when they are used to pay for qualified education expenses. These funds can also be used to repay student loans of up to $10,000 lifetime limit per individual. Also, any remaining funds in the account can be transferred to another eligible beneficiary to use for qualified education expenses.

Q. Are there any federal tax benefits for college?
A. There are two different federal tax credits that are available to be used to reduce your federal income tax expense. First, there is the American Opportunity tax credit. It provides for a maximum benefit of up to $2,500 per eligible student. It is only available for the first four years of post-secondary or vocational school and for students pursuing a degree or other recognized education credentials per the IRS. This tax credit is also partially refundable, meaning that if you don’t owe any tax you may still receive a refund from the American Opportunity tax credit. The second credit is the lifetime learning credit. This credit can be up to $2,000 per tax return, per year, no matter how many students qualify. This is also available for all years of postsecondary education and also for courses taken to improve or provide job skills. There isn’t a limit for the number of tax years this credit can be taken. The IRS provides an Interactive Tax Assistant tool to help you determine if you are eligible for one of these credits as well.

Q. Are there other deductions for the cost of a college education?
A. Yes, one other example of something that may be deductible is student loan interest. There are income limitations that if exceeded eventually phase out the amount of student loan interest deduction.

Q. Any other tax planning issues around college?
A. Something important to keep in mind, sometimes scholarship or grants may be considered taxable income. If you receive enough scholarship/grants or something specific that pay for room and board that would fall outside of qualified education expenses and is taxable. Scholarships and grants are tax free if they don’t exceed qualified education expenses in a tax year.

Josh Mullins, CPA, is a partner at Arledge, the largest locally owned accounting firm in the Oklahoma City metropolitan area. Arledge is a recognized leader in the accounting industry offering practical solutions in the areas of tax planning, auditing, consulting, accounting advisory services and client accounting.
This article contains general information only and does not constitute tax advice or any other professional services. Before making any decisions or taking any action that might affect your income taxes, you should consult a professional tax advisor. This article is not intended for and cannot be used to avoid future penalties that may be imposed by the Internal Revenue Service.

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