College Tax Breaks: Staying Organized for Tax Season

by Cynde Quinn, former financial aid officer at Hesser College I Received a Letter From the IRS!  Words no one ever wants to utter, but, until it comes, many of us don’t give tax breaks a second thought. We pay our bills as required, and at the end of the year hand over our statements and shopping bags full of receipts to our accountants. Or we let our home-based software figure out what’s in our best interest and never actually sift through the bag of receipts we’ve been hoarding because we “remember” what we paid. Until it comes. A correspondence letter requesting supporting documentation, or worse, the dreaded deficiency notice. And we quickly realize we’re not as organized as we thought we were. Parents sending their first child off to college can easily fall in this group. While signing up for payment plans, completing emergency contact forms, health forms, assisting with roommate selection and housing applications, orientation packets, etc., how are we expected to keep track? The likelihood of being audited remains low; in fact, amidst IRS budgetary pressures, audit rates for individual returns have declined since 2010. Despite that happy statistic, if you are using a tax-advantage college savings plan, such as a 529 Investment/Prepaid Plan or Coverdell ESA, or you are claiming a college tax break like the American Opportunity Credit or Lifetime Learning Credit, your chance of raising that red flag does, in fact, increase. No need to panic though. With a good paper trail (not a plastic bag), you have nothing to fear. Documentation you may be asked to provide Tuition and Fees: Maintain college transcripts, cancelled checks, or receipts for amounts paid. Note that college application fees, insurance, and student health fees are not qualified expenses for education tax breaks. Books and Materials: Keep copies of course syllabi detailing required materials and book receipts, as well as computer technology or equipment purchases and paid statements for internet access. Housing: If your student is living off-campus, you’ll want to document the school’s room and board allotment, as reported to the U.S. Department of Education, published in their annual cost of attendance. Documentation provided to you Form 1098-T: A statement of tuition, grants, and scholarships issued by eligible educational institutions. Form 1098-E: A statement of interest issued by lenders to borrowers who pay $600 or more in student loan interest. Form 1099-Q: A statement of withdrawals issued by 529 Investment/Prepaid Plans and Coverdell Education Savings Accounts. If you received payments for educational expenses, you will also need to provide documentation of any of the following: employer provided educational assistance benefits, nontaxable U.S. savings bond interest, veteran’s educational assistance, or any other nontaxable payment received for education expenses. When preparing to file this year, reduce your risk by double checking your numbers (the most common flags are raised by simple math errors) and lining up your records. Match social security numbers on the 1099-Q and 1098-T by having 529 Plan distributions made payable to the student or the college. The IRS will be more apt to presume the distribution was qualified than if paid to the account owner. And if using the plastic bag method, it’s time to upgrade. It’s good practice to use the same credit or debit card for college expenses and print a cumulative statement at the end of the year, or perhaps use an app to track receipts. Rest assured, whether you’re a parent of a first-time college goer or this is your fifth time through, if you’re paying college expenses this year, it’s not too late to get organized.