Graduating Children’s Impact On Your Taxes

Most U.S. colleges annually graduate their students from late spring to summer; particularly May and June. According to the National Center for Education Statistics, about 3.8 million students are expected to graduate for the 2014-2015 academic year. Most parents have already celebrated their children’s graduation the past months; and other parents are expected to do so in the coming months.

Graduation is a life changing event. This change among other areas of our lives impacts the tax situation of parents. Parents claim a number of tax benefits for their dependent college children. Many of these tax benefits are lost when our children get a job and earn their own incomes after graduation. As we see our kids chart their own path of life after graduation, we need to make adjustment to our tax situation before the year ends so we do not get surprise when we prepare our tax returns. Some of these tax benefits are:

Exemptions
Parents claim their college children on their tax returns as dependents if their children are not working or do not earn enough income to fully use their exemption- $4,000 for 2015. After graduation, these children become fully employed and claim the exemption when they file their own tax returns. This makes the exemption unavailable to their parents. Parents discover this quite late when filing their tax returns; and can be challenging when the outcome of the tax returns is tax liability. Around mid-year till the end of the year is the appropriate time for parents who will experience this change to consult with their tax professionals to review their tax situation and plan for any adverse change prior to year-end.

Education Credit
Depending on the types of Education credit you claim, tax payers can claim up to $2,500 a year. 2015 may be the last time some parents will be claiming this credit.

Student loan interest
As noted above, eligible tax payers get part of their tuition written off as tax credit; and when you took a loan to pay for your education, you also get a tax credit for the interest you pay on the loan. This can be missed especially in the first year but with proper tax planning the parents or their children can claim this credit.

graduating-cap
Most states allow tax payers to contribute to College Savings for the children which are used to pay qualified tuition. Tax payers write off their contributions up to the limit established by their state. Parents can continue to contribute to 529 for their kids and pass it over to their grandkids if their kids never use it.

It is important to note that some of these credits are prorated based on the tax payers income and after a certain income level, they disappear. Hence we recommend that you talk to your tax professional before adopting any of these tax credits.

It is important to note that some of these credits are prorated based on the tax payers income and after a certain income level, they disappear. Hence we recommend that you talk to your tax professional before adopting any of these tax credits.

Edwin Agbonyitor is a tax accountant, management consultant, certified QuickBooks ProAdvisor, professional bookkeeper, certified fraud & forensic examiner, information security analyst and president & founder of 3E Global Konsulting LLC. Contact Edwin at edwin@3egk.com or 301-922-1262

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