One of the biggest expenses most people will face during their lifetime is the cost of education, both for their children and for themselves. However, with a little creative planning, you can lower those education expenses with some help from the IRS.
Buy a second home for your child to live in at college. Instead of paying housing expenses to a college or paying rent to a landlord, your child can live in your second home. If it is your only second residence, you can take several deductions.
You can deduct the interest on the mortgage for your second home as long as the total of the mortgages on your primary residence and your second residence is not more than $1,000,000. You must use the mortgage proceeds to buy, build, or improve the home.
You can deduct the interest on a home equity loan as long as the total of the home equity loans on both of your residences do not exceed $100,000. And the home equity loan cannot exceed the home’s fair market value less the mortgage which was used to buy or improve the home.
If your child pays you a fair market rent and you actively manage the property yourself, you can deduct your property taxes, maintenance, repairs, depreciation, utilities, and other expenses from your rental income. The maximum rental losses you may deduct is $25,000 if your Adjusted Gross Income does not exceed $100,000. If your Adjusted Gross Income is between $100,001 and $150,000, the $25,000 maximum deduction is phased out.
You can deduct the cost of non-reimbursed tuition, books, and supplies if your employer requires you to take courses as a condition of your employment, or if you take courses to maintain or improve your job skills. If you travel directly from work to school, you can also deduct transportation costs, including tolls and parking.
However, education expenses must be included as miscellaneous itemized expenses on your personal income tax return and you can only deduct your total miscellaneous itemized expenses to the extent that they exceed 2% of your Adjusted Gross Income.
The maximum deductible amount of interest on education loans is $2,500. Deductibility is based on income. If your interest is greater than $2,500 or is limited, it may be better to take out a home equity loan because the interest is fully deductible. By using the proceeds from a home equity loan, you effectively convert your interest on education loans to fully deductible interest.
For 2012, an enhanced version of the Hope scholarship tax credit, called the American opportunity tax credit, is available to taxpayers who paid tuition and other expenses for an eligible student during 2012. The amount of the credit is 100% of the tuition and related expenses paid by the taxpayer during the tax year for education furnished to the eligible student during any academic period beginning in the tax year up to $2,000, and 25% of the next $2,000 of the same expenses, for a maximum credit of $2,500.
Tuition, required enrollment fees, books and other required course materials generally qualify, and eligible students must be enrolled at least half-time.
The American opportunity tax credit is allowed for four tax years per student, and for the first four years of post-secondary education at an eligible educational institution. Even taxpayers who owe no tax can get a payment of the credit of up to $1,000 for each eligible student.
