Heading off to college comes with more than books and dorm checklists; it can also bring tax implications worth planning for now.
Education Tax Credits like the American Opportunity Credit or Lifetime Learning Credit can help offset tuition, fees, and course materials for up to $2,500 of tax savings from tax credits, subject to income limitations. If you have no income tax liability to offset against the tax credit, $1,000 of this credit can be refunded too!
529 College Savings Plans grow tax-free and can be used for qualified education expenses. While federal contributions aren’t deductible, NJ allows a state tax deduction for contributions to the NJBEST 529 College Savings plan of up to $10,000 per year, subject to income limitations. Unfortunately, out -of-state 529 plans do not qualify. The NJ BEST Plan also offers up to $6,000 a scholarship if the beneficiary attends a New Jersey College and the account has been open for at least four years. They also offer a one-time grant of up to $750.00, matching the initial deposit into a NJ BEST plan, for families earning less than $75,000 per year.
529 Distributions Be careful not to withdraw more funds from a 529 account than the current year’s qualified college expenses and consider any scholarships that will reduce the tuition expense. Excess 529 distributions become taxable income and may be subject to a 10% penalty, as well.
Scholarships and Grants aren’t always tax-free. If the funds are used for room and board or come with service requirements, they could be considered taxable income.
Dependency Matters. Not all students qualify to be claimed as a dependent. The IRS has specific rules based on age, enrollment, and financial support. This can impact who claims education credits and how your taxes are filed.
Roommates, Jobs, and More
If your student takes on a part-time job, they may need to file a tax return even if they earned under the standard deduction to receive any withheld income taxes. Review proper W-4 settings and understand what tax documents to expect in the spring (like a W-2 or 1099).
NJ Class Loans – student loans that are part of the NJCLASS program and that are administered by the Higher Education Student Assistance Authority (HESAA) qualify for the deduction of principal and interest payments of up to $2,500 per year – subject to income limitations.
Now is the time to start a system for tracking tuition payments, scholarships, and expenses. Keep Form 1098-T and any relevant receipts for tax preparation time. Start your tax info folder now and save yourself from stress later.
Not sure where you fall?
Tax rules around college can be tricky. Whether you’re a parent, student, or both, David A. Santini, CPA, LLC is here to help you navigate education-related tax questions and plan ahead with confidence.