As a parent, you want to give the best to your children; this includes ensuring that they have a quality education, include college. However, college comes with many challenges financially and, at tax time, presents a unique question of how you, as a parent, are going to file your tax return. Find a tax preparer that is able to understand tax deductions that are in connection with debt. Specialist, Daniel Farmer, at The Accounting & Tax Company in Florida will be able to handle all of your questions.
The amount of student loan debt in the United States is enough to make anyone cringe. As of July 2015, the total amount of outstanding student loan debt was $1.1 trillion. Every year, 12 million college students have an average total of $30,000 in debt at the time of graduation or starting their first job. Some parents do not wish to allow this debt to hang over their child’s head when they are just starting out, so they are choosing to pay the loan balance.
As of 2014, 85 percent of parents surveyed that have college aged students have stated that they help their children financially, in different ways other than paying their student loans. Those parents who actually shell out money for the student loan debt is roughly 50 percent.
Most parents of college aged children would be considered legally obligated for the student loan. Being legally obligated means that if the child defaults on the loan then the parent will be responsible for the payments because they co-signed the loan or otherwise have their name on the loan.
Whether you choose to assist your child in their education or not, you need to be aware of the financial consequences on you. Some parents can cause serious damage on their own retirement nest egg by trying to help out their children. When you choose to pay for your child’s student loan there are two methods for handling the taxes and the potential tax deduction.
It is also important to note for parents, if you use a home equity loan in order to pay for college or a similar loan vehicle you cannot double dip the tax deductions. As an example, you take out a home equity line of credit to pay for your child’s student loan and you receive a tax deduction on the interest paid on the line of credit. You are unable to receive a tax deduction on both the interest paid on the line of credit and the interest paid on the student loan. You must choose the deduction that would be the most beneficial.
Another tax deduction is specifically for those parents that have a child currently in school. Parents are able to claim the tuition and fees of higher education to deduct on their taxes. The amount that can be deducted is up to $4,000. The student must be enrolled in part-time courses and if you choose to claim any tax credits, then you do not qualify for this deduction.
The IRS has very specific rules on what you can claim as a deduction and in what combination that you can use both deductions and tax credits. Seek out a qualified tax preparer or tax professional, like Daniel Farmer at The Accounting & Tax Company, in order to get the information that you need to make an educated decision.
