Tax Facts

The last several weeks we have been talking about commonly missed deductions and where I see, as a practicing CPA, many missed opportunities. Today I want to shift focus toward the future.

All of us generally want to know two key questions: “What do I have to do to make more money?” and “How can I save money on my tax bill?”

The issue I wish to share today is one simple answer to both these questions: Add to your education and improve your employable skills with Uncle Sam giving me some reduced taxes for doing so.

The tax law has long had incentive for individuals to obtain and to continue their educational pursuits after high school. Today we have four distinct ways for some or most of the costs of education to be encouraged via the tax code. They are a) the American Opportunity Credit, b) the Lifelong Learning Credit, the Education Deduction, and the Un-reimbursed Employee Business Expense for education.

1. American Opportunity Credit (AOC).Professor Rick Gaumer, CPA This is a very aggressive credit. It relates to the cost of tuition and fees/supplies (not room and board). It is 100 percent for the first $2,000 paid, and 25 percent of the next $2,000 paid, for a maximum of $2,500 credit (a max of 40 percent or $1,000 is ‘refundable’ should no taxes be due). The credit works for only four tax years, so pick those years where you can max it out. For parents, this credit can be taken for each dependent in post-high institutions. For tax returns with income more than $80,000 ($160,000 married) this credit is phased out.

2. Lifetime Learning Credit (LLC). After the AOC, the Lifetime Learning Credit is a longer term credit to be taken in any tax year by the taxpayer or dependents. It is 20 percent of tuition and certain other costs, up to a max credit of $2,000 per return. It phases out at $53,000 of income ($107,000 for married couples).

3. Tuition and Fees Deduction. This is an alternate to these credits and is a dollar-for-dollar income reduction up to a max based on family Adusted Gross Income. This deduction is tricky to calculate and is often less desirable than the credit. Most software tools (Turbo Tax, etc.) will check whether this option is better than taking the credit.

4. Un-reimbursed Employee Business Expenses. Many employed taxpayers continue their education in order to be ready for promotion or other advancement in their careers. Besides the two credits above and deduction, it may be possible to deduct education expenses as an Itemized Deduction. I see taxpayers who are taking a course, or even a full academic program, to enhance or improve their skills in their ‘existing position’ as an employee. This itemized deduction may be a better option since it includes un-reimbursed tuition, books, and supplies. It includes what the others do not allow: the mileage to and from school. The key to this deduction is whether the education improves or enhances one’s current job skills. If so, you can claim these costs on Schedule A. If the education meets new job skills required for a new profession (like becoming a CPA or becoming a nurse), then this option does not qualify.

5. Also, Do Not Forget…Wisconsin allows a subtraction from Wisconsin taxable income all tuition paid (up to a $6,943 max per return) to any Wisconsin-based institution of higher learning. Many taxpayers miss this one!

Rick Gaumer has taught college-level accounting and income tax subjects for UWGB, UWM and Lakeland College for many years and is an expert on getting students prepared for the CPA exam. Rick now works as a tax consultant for the Leuthner Tax Office, an H&R Block affiliate located in Sturgeon Bay.