College Tuition Tax Write-Offs after Divorce
Divorce might be one of the most difficult events in your life. Aside from the emotional toll, the divorce process costs an average of $17,250. Don’t forget to consider the financial implications of your custody decree as you divide your assets, including automobiles, residences, and retirement accounts.
If you have a college-aged child who receives Form 1098-T, you may be eligible for one of three distinct education tax breaks. What’s more, if someone else pays the tuition (under a Separation Agreement), but you claim the child as your dependant utilizing the dependency exemption, you may be entitled to enjoy the benefit even if you didn’t write the check.
Did you get Form 1098-T?
If your student is anything like mine, they never forwarded the email from the school informing them that the form was ready for download in January. Some schools will mail the form to the student’s home address, while others will include it on a protected student site for download. I’ve been through both experiences with my two daughters’ schools.
Form 1098-T (“T” for tuition) reports the amount received or billed for eligible tuition and related costs throughout the academic year (January to March) in Box 1 or Box 2. It also includes other numbers, such as Box 5 – the number of scholarships or grants obtained by the student – and Box 8, which indicates if the student was enrolled at least half-time. Your student must be enrolled at least part-time at a ‘qualified’ institution to be eligible for any of the education tax benefits. Almost all accredited public, nonprofit, and private postsecondary schools are considered eligible.
Three Tax Benefits For Education
The three different benefits are:
- The American Opportunity Credit,
- The Lifetime Learning Credit, and,
- The Tuition and Fees Deduction
Generally, you can claim one of these benefits if all three of the following requirements are met.
- You pay qualified education expenses,
- You pay the education expenses for an eligible student,
- The eligible student is a dependent for whom you claim an exemption on your tax return
Remember how I said you may get the benefit even if you didn’t write the check? This is correct for the first two credits but not for the Tuition and Fees Deduction.
Lifetime Learning Credit and American Opportunity Tax Credit
What’s the distinction between a tax credit and a tax deduction?
A tax credit, like the first two benefits, results in a dollar-for-dollar reduction in the amount of taxes owed. A tax deduction, such as Tuition & Fees, reduces the part of your income that is taxable. It is advisable to talk with your accountant to determine which benefit is best for you, but credit is often the better offer.
All of the tax benefits have a qualifying element that may have barred you from claiming the credits or deductions when you were married. If your MAGI – Modified Adjusted Gross Income – exceeds a specific threshold, you cannot claim these benefits.
To be eligible for the full credit in 2022, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less if married filing jointly). These income restrictions are not inflation-adjusted and have not altered in recent years.
If your MAGI is over $80,000 but less than $90,000 for single filers and over $160,000 but less than $180,000 for married filing jointly filers, you can receive a reduced amount of the AOTC credit.
Many unmarried women (or men) who are receiving alimony and/or child support may fall within one of these income limits. Remember that child support is not considered income and hence will not be included in your MAGI.
One of the most advantageous aspects of these credits is that ‘qualified education expenses’ paid directly to an authorized educational institution for your dependent under a court-approved separation agreement (or divorce order) are recognized as ‘paid’ by your dependent. So, if you claim that dependant, you are regarded to have paid those expenses and, if all other requirements are met, you are eligible for the credit. This is especially handy if your ex-spouse or the child’s grandparents are paying all or a portion of the eligible expenses.
Qualified Education Expenses
It’s critical to understand what ‘qualified education expenses’ are. Qualified education expenses include tuition and some related expenses required for enrollment or attendance at an approved educational institution for the purposes of all benefits. Whether or not the items were acquired from the educational institution, spending for books, supplies, and equipment required for a course of study are eligible expenses. This means that the amount billed on Form 1098-T for qualifying tuition and related expenditures may differ from what you or someone else paid. You may be able to use ‘other connected expenses’ that you can document when calculating the credit if you can document them. Certain other expenses, such as room and board, are not eligible expenses.
Because there isn’t enough space in this paper to cover all of the qualifications and characteristics of these two education credits, you should contact your accountant or go to IRS.gov to read ‘Publication 970 – Tax Benefits For Education‘ for additional information and to see what more you need to qualify.
Other limits apply, such as no ‘double-dipping’ (using both advantages for the same student), however, if you have two children in school, you can use these credits for different pupils. It is also vital to understand that any sums received in scholarships, grants, tax-free educational help, or employer support cannot be deducted as an eligible expense.
Tuition and Fees Deduction
If you do not qualify for the American Opportunity or Lifetime Learning Credit, this deduction may be useful to you. The key distinction is that the individual claiming the deduction must have paid the qualified expenditures. You are not considered to be paying the expenditures actually paid by the student or someone else for this deduction. You must have paid the expenditures in order to claim this deduction, and you must be allowed to claim an exemption for the student as a dependent.
If qualified educational expenses are paid directly to an eligible institution by someone else under a court-approved separation agreement or divorce judgment, the expenses are recognized as being paid by the student, and only the student (on their own tax return) can claim the deduction.
If you do not list your child as a dependant and let them file their own tax return, it may make more sense and result in a higher tax gain. If your income exceeds the MAGI limitations, your child may be eligible for either the credits or the deduction. Again, your accountant can run the two scenarios for you to see who gets the most tax break.
If your child files their own tax return and receives a tax refund, consider it an added bonus that can be allocated to next year’s tuition (though it may affect financial assistance), contributed to a Roth IRA or even used to pay off student loan debt. How awesome is that?
Divorce is a difficult and messy process. Depending on your children’s ages, you may have to live with the final decision for many years. Discuss with your lawyer and accountant the financial aspects of raising your children that you should consider. Going back to court to correct an error can be costly.
Tax laws, as well as deduction limitations and percentages, alter. While you can’t predict what the government will do in the future, you can have your lawyer design wording that allows for renegotiation at key points. Reassessments can be tied to kindergarten, high school, university, or other times when it may be appropriate to reexamine your original agreement.
Failure to check your eligibility for these school tax benefits, or accepting the incorrect write-off for college, is a typical mistake that can prevent you, your ex-spouse, or your child from receiving the full refund you are owed.
Being aware of these benefits during the divorce process and addressing them in your separation agreement or divorce decree can save money and conflict after the divorce by ensuring that the correct person claims the dependency exemption and that both spouses take full advantage of our tax laws based on their incomes.