Educational credits


R

Rick

My son attends college in Florida. His tuition is paid
through the Florida prepaid tuition program, which we
purchased on his behalf when he was very young. In addition
to the prepaid program, he has received the Florida Bright
Futures scholarship as well as a scholarship from the
school. Since his tuition is paid through the prepaid
program, the Bright Futures and school scholarships are
applied to his dormitory expenses and other fees, and
anything left over is paid to him for his use on textbooks,
etc.

Since his actual tuition costs come from the Florida prepaid
program, which we purchased, can we claim our cost basis in
that program as an educational credit on our tax form
(either Hope or lifetime)? The tax form seems to say that
we would have to reduce our credit by other scholarships
received, but the scholarships weren't actually used for
tuition; they were used for housing, other fees and
textbooks.
 
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D

David Woods, EA, ChFC, CLU

Rick said:
My son attends college in Florida. His tuition is paid
through the Florida prepaid tuition program, which we
purchased on his behalf when he was very young. In addition
to the prepaid program, he has received the Florida Bright
Futures scholarship as well as a scholarship from the
school. Since his tuition is paid through the prepaid
program, the Bright Futures and school scholarships are
applied to his dormitory expenses and other fees, and
anything left over is paid to him for his use on textbooks,
etc.

Since his actual tuition costs come from the Florida prepaid
program, which we purchased, can we claim our cost basis in
that program as an educational credit on our tax form
(either Hope or lifetime)? The tax form seems to say that
we would have to reduce our credit by other scholarships
received, but the scholarships weren't actually used for
tuition; they were used for housing, other fees and
textbooks.
You can't claim tax exempt money for educational tax benefits.
 
V

Victor Roberts

You can't claim tax exempt money for educational tax benefits.
New York gives a tax deduction for up to $5000 ($10000 MFJ)
for contributions to a 529 plan; they then allow you to use
all funds received from a 529 plan for qualified educational
expenses for the NYS college credit or deduction
 
R

Rick Merrill

Rick said:
My son attends college in Florida. His tuition is paid
through the Florida prepaid tuition program, which we
purchased on his behalf when he was very young.
So he "owned" it and there is no deductible for you.
In addition
to the prepaid program, he has received the Florida Bright
Futures scholarship as well as a scholarship from the
school. Since his tuition is paid through the prepaid
program, the Bright Futures and school scholarships are
applied to his dormitory expenses and other fees, and
anything left over is paid to him for his use on textbooks,
etc.
No tuition = no deductible there either.
Since his actual tuition costs come from the Florida prepaid
program, which we purchased, can we claim our cost basis in
that program as an educational credit on our tax form
(either Hope or lifetime)?
No: the school is not going to send you a tax deductible
receipt.
The tax form seems to say that
we would have to reduce our credit by other scholarships
received, but the scholarships weren't actually used for
tuition; they were used for housing, other fees and
textbooks.
No tax deduction there either; sorry.
 
R

Rick

You can't claim tax exempt money for educational tax benefits.
The earnings on the prepaid plan are tax-exempt, but we
weren't considering claiming this. The part we wanted to
claim was our basis in the fund, which we purchased years
ago with post-tax dollars.
 
D

David Woods, EA, ChFC, CLU

New York gives a tax deduction for up to $5000 ($10000 MFJ)
for contributions to a 529 plan; they then allow you to use
all funds received from a 529 plan for qualified educational
expenses for the NYS college credit or deduction
Which has exactly what to do with federal taxation? You did
notice that the poster was referring to Florida, right? A
state without income tax? Ergo, he could have only possibly
have referred to federal taxation.
 
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D

David Woods, EA, ChFC, CLU

The earnings on the prepaid plan are tax-exempt, but we
weren't considering claiming this. The part we wanted to
claim was our basis in the fund, which we purchased years
ago with post-tax dollars.
The law is quite specific. Any payment of tuition made from
tax excludible money reduces the amount of tuition available
to take the credit on. Since any money from a 529 plan
(which included PPTs) is tax excludible, there is no tuition
to claim a credit on here.
 
V

Victor Roberts

Which has exactly what to do with federal taxation?
Nothing.

You did
notice that the poster was referring to Florida, right?
No.

A
state without income tax?
Yes, I know that.
Ergo, he could have only possibly
have referred to federal taxation.
I was commenting only on your short statement that "You
can't claim tax exempt money for educational tax benefits."

I would generally agree with you, so I find the NY double
deduction quite surprising. And, if I had not recently
completed my NY return I would not know of the double
deduction. Do you know if any other states allow the same?
 
D

David Woods, EA, ChFC, CLU

Yes, I know that.
I was commenting only on your short statement that "You
can't claim tax exempt money for educational tax benefits."

I would generally agree with you, so I find the NY double
deduction quite surprising. And, if I had not recently
completed my NY return I would not know of the double
deduction. Do you know if any other states allow the same?
I believe there is a state or two that might allow a credit
or something. I know many have breaks for actual tuition
paid though.
 
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D

Drew Edmundson

Rick said:
My son attends college in Florida. His tuition is paid
through the Florida prepaid tuition program, which we
purchased on his behalf when he was very young. In addition
to the prepaid program, he has received the Florida Bright
Futures scholarship as well as a scholarship from the
school. Since his tuition is paid through the prepaid
program, the Bright Futures and school scholarships are
applied to his dormitory expenses and other fees, and
anything left over is paid to him for his use on textbooks,
etc.

Since his actual tuition costs come from the Florida prepaid
program, which we purchased, can we claim our cost basis in
that program as an educational credit on our tax form
(either Hope or lifetime)? The tax form seems to say that
we would have to reduce our credit by other scholarships
received, but the scholarships weren't actually used for
tuition; they were used for housing, other fees and
textbooks.
I don't agree that the credit isn't applicable because it
was paid with "tax exempt" income. The part paid with
principal didn't come from tax exempt income. See (while
not exactly on point) 222(c)(2)(B) where 529 principal
qualifies for the education deduction. On the other hand I
am still not sure you get a credit. 25A(g)(4) says:

(4) Treatment Of Certain Prepayments.--

If qualified tuition and related expenses are paid by the
taxpayer during a taxable year for an academic period which
begins during the first 3 months following such taxable
year, such academic period shall be treated for purposes of
this section as beginning during such taxable year.

-------
Obviously this prepayment doesn't meet the three month rule.

Reg. 1.25A-5(e)(1) says:

Except as provided in paragraph (e)(2) of this section, an
education tax credit is allowed only for payments of
qualified tuition and related expenses for an academic
period beginning in the same taxable year as the year the
payment is made. Except for certain individuals who do not
use the cash receipts and disbursements method of
accounting, qualified tuition and related expenses are
treated as paid in the year in which the expenses are
actually paid. See Section 1.461-1(a)(1).

--------
So it doesn't look very good for claiming the credit. My
only thought is that a payment into the prepaid plan might
not be a payment of tuition. The payment of tuition doesn't
happen until the plan sends the money to the university,
college, etc.

Note that 25A(g)(2) doesn't include prepaid tuition plans as
a reduction in eligible payments.

One thing that hasn't been discussed yet is the taxability
of your son's scholarships. Scholarships are tax exempt
(see 117) to the extent used for qualified tuition, fees,
books and educational supplies. Since you say you are using
the scholarships for his room and board that portion of the
scholarship is taxable. But if you say the scholarships pay
the tuition, fees, etc then the scholarship isn't taxable
but the amount eligible for the credit is reduced or
eliminated. Then you have to determine if the prepaid
tuition plan payments are taxable since they weren't used
for qualified tuition and fees. Is this plan a 529 plan?
If so then the payments can be for room and board as long as
your son is at least a half time student.

You should sit down with someone and go over your actual
numbers - scholarships, prepaid tuition program payments,
education expenses, your income and deductions, and your
son's income and deductions. Your situation is too involved
for a board like this.
 

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