Time to Brush Up on College Tax Credits and Deductions

Published Date:
Feb 11, 2014

Ask any accountant what time it is, and you'll hear "tax season."  But ask a the parent of a college-bound high school senior, and the answer will be "financial aid season." Fortunately, the two answers blend, as colleges demand information from the tax returns—and even the returns themselves—in order to calculate financial aid. Now is the time for CPAs and clients to work together on college funding, and New York is giving timely help with a recently updated page on college tuition credits.

The state credit or deduction is available to those who meet all of the following conditions:

  • Full-year New York state resident.
  • Spouse or dependent (for whom you have taken an exemption) was an undergraduate student who paid qualified tuition expenses.
  • Are not claimed as a dependent on another person's tax return.

In this context, qualified tuition expenses include only undergraduate expense. Expenses paid from a qualified state tuition program (like New York's 529 College Savings Program) also count. But you can't include any of the following:

  • Tuition paid through scholarships or other financial aid that need not be repaid.
  • Amounts paid for room and board, and other similar personal or living expenses.
  • Amounts paid for books, equipment, and activities, even if required by the school.

The credit isn't huge when compared with the cost of even state colleges—no more than $400 a year. However, any parent will admit that every bit helps. If the credit is more than the amount of state tax owed, the taxpayer can claim a refund. And don’t forget the deduction; the maximum deduction is $10,000 for each eligible student, and it may be a better deal: The college tuition itemized deduction may offer taxpayers a greater tax savings, according to the NYSDTF, if they itemize deductions on their federal returns.

Taxpayers can claim the New York credit or deduction even if they claim a federal credit or deduction for qualified college tuition expenses, according to the NYSDTF. There is no limit on the number of eligible students for whom you may claim a credit or deduction.

More details are available in the Instructions for Form IT-272, which includes a worksheet for calculating the deduction and credit and figuring out which method is most advantageous. However, taxpayers may not claim both the credit and the deduction.

Other College Tax Issues

In the spring, parents will be filling out the Free Application for Federal Student Aid (FAFSA). Although many have already filled it out with estimates, most schools will require a final version based on returns for the 2013 tax year. To make it easier, the FAFSA can actually pull data from filed returns from the IRS, saving taxpayers the laborious and error-prone task of copying figures from a tax return into the form.

An annual FAFSA is required at virtually every school as a condition for financial aid, and additionally, some schools—particularly the more expensive private colleges—may require supplementary forms and information. Be prepared for clients who ask for multiple hard copies of returns; some colleges want copies of the 1040s and other major schedules, along with W-2 forms, to help calculate financial aid.

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