🔒How to navigate tuition assistance and be tax-smart

With fall upon us, students are settling in to campus life. Each semester is a beginning — new courses, professors and challenges, including how to pay the tuition bill.

Student-loan debt continues to grow exponentially, imperiling the financial stability of a generation, perhaps two. A systemic overhaul may be slow in coming, but state and federal incentives exist that may make the tuition-payment process less daunting.

It’s important for students and their families to understand eligibility so they can optimize each benefit.

As part of its efforts to attract young professionals to Maine, the state created the Education Opportunity Tax Credit in 2008. The EOTC is beneficial for students who are actively pursuing or who have recently completed a degree.

An individual living and working in Maine, and who earned a degree from an accredited school in the United States, may be eligible for tax credits based on the student-loan payments — both principal and interest — made during the year. The payment amount eligible for the credit is limited to an upper cap called the benchmark loan payment. 

In 2018, the benchmark loan payment was $4,524. Businesses also may be eligible for the tax credit if they’ve agreed to pay a student’s loan. Associate degrees or bachelor’s degrees in science, technology, engineering or math (STEM) entitle the student to a refund for any tax credit remaining after it’s applied to income-tax liability. Graduate degrees or non-STEM bachelor’s degrees do not qualify for refunds, but the student may carry forward the remaining available tax credit for up to 10 years.

There are tax incentives available before the prospective student can even walk or talk. Families should consider contributing to a 529 investment plan to help save for education expenses. Earnings accumulate in these accounts tax-free. Withdrawals are free from taxation if used to pay qualified education expenses, such as tuition, fees and textbooks.

Maine’s version of this investment plan is known as the NextGen 529 account. In addition to the tax benefits of all 529 plans, Maine has additional perks, including various financial incentives.  

Most surprising about both the EOTC and NextGen 529 accounts is that neither is subject to income-based phaseouts. In contrast, the education-related federal tax credits and deductions listed below are impacted by these limits, resulting in a gradually decreasing benefit as the taxpayer reaches certain income thresholds.

• The American Opportunity Credit allows a maximum credit of $2,500 per student for the first four years of higher education. The credit allows a student to claim all of the first $2,000 spent on tuition, books, equipment and school fees. In addition, the student can claim 25% of the next $2,000 for a total of $2,500. If the student has no tax liability in the year the credit is received, 40% of the credit is refunded.
• The Lifetime Learning Credit allows a maximum credit of $2,000 per student per year. The credit allows the student to claim 20% of the first $10,000 paid toward tuition and fees. There is no limit on the number of years the credit can be claimed.
• The student loan interest deduction allows taxpayers to deduct up to $2,500 of interest paid annually on qualified student loans. This deduction reduces taxable income regardless of whether the individual itemizes or takes the standard deduction.

Ryan Harney, a principal at Dufour Tax Group, is a member of the Maine Society of CPAs. He can be reached at ryan@dufourtax.com.