Tax Credits for College Tuition, Senior Tax Administrator Style

I just finished and submitted my taxes! I’ll be getting a refund on both my state and local taxes (albeit only $3 from Taxachusetts) Although both my refunds are relatively low, I’m still very pleased. In the middle of last year, I used the handy dandy IRS Withholding Calculator to figure out that I had already paid a significant portion of my taxes due for the year. Since inflation decreases the value of any tax refund, I decided that I wanted more of my money now, so that I could gain interest on it or just use it. So I went ahead and changed my exemptions to a much higher number than I was qualified for and started getting more money per paycheck!

Hopefully that explains why, even though I got a small refund, I’m pumped that I even got a refund! I won’t bore you with the full details of my return, but I will share some interesting interpretations of U.S. tax law in relation to college tuition expenses.

I will only discuss the federal tax implications as I did not receive any tax benefit from Massachusetts for my tuition expenses. Massachusetts does not allow for full deduction/credit of tuition expenses. Rather you must compute your adjusted gross income and then, if the tuition expenses exceed 25% of your AGI you may deduct them (mine did not). In my situation, it wouldn’t have increased my refund that much more, but it’s still just plain silly. This state should encourage residents to obtain a college education and the current tax structure does not. College educated residents make more money, which in turn generates more money for the state.

In the Spring of 2006, I enrolled in two classes at UNC – Chapel Hill, for which I paid $1320 in tuition and fees ($660 per class) out of my own pocket. This past Fall semester, I took two courses at Northeastern University for which I paid $2208. My employer reimbursed me $1636 for these two classes, but not until 2007. At the end of the year I also signed up for a class at my current school, Umass Amherst, but the money wasn’t taken out of my account until 2007. Depending on which interpretation of accounting standards you follow, this transaction could be claimed in 2006 or 2007! I have an e-mail showing that I sent my payment to Umass Amherst in 2006, so I could use that to show that I paid for the class in 2006, just that Umass did not accept my payment until 2007.

There are a few options on how to calculate these expenses:

1. $1320 + $2208 = $3528
2. $1320 + $2208 – $1636 = $1892
3. $1320 + $2208 + $1240 = $4768
4. $1320 + $2208 + 1240 – $1636 = $3132
5. $1320 + $2208 +1240 – $1636 – $1200 = $1932

The UNC tuition is pretty standard and will be claimed as tuition & fees expense of $1320 in all four methods. The Northeastern tuition on the other hand could be claimed as $2208 or as $572. The reason for this is that the $1636 reimbursement can be used to offset the tuition expense in the year the tuition expense is filed, even though the reimbursement was not received until 2007; it does not not need to be filed this way though, hence why the option for claiming $2208 is also available.

Options 3 through 5 are merely adding in the Umass tuition on the basis that the payment was sent out in 2006. Option 4 deducts the Northeastern reimbursement from the tuition expenses and option 5 deducts the reimbursement for both Northeastern ($1636) and Umass ($1200).

You might think there’s one clear method to use, but the IRS’ stance on the issue, found on their Lifetime Learning Credit page, is somewhat murky. They state that the reimbursement should be claimed in the year it is received, however, if you receive the reimbursement before you file your claim, you may reduce your tuition expense by the reimbursed amount. In essence, if you reduce your tuition expense by the reimbursed amount, you reduce your tax credit for that year. If you do not reduce your tuition expense by the reimbursed amount for the year you paid the tuition, then you must make note of it on the following year’s income statement.

So which option did I choose and why? I claimed tuition expense of $3528, option 1. Techically, I could have claimed option 3 and received a bigger refund this year, but it would have only netted me an extra $200. Considering that I’ll have un-reimbursed tuition expenses this year, I decided to keep the Northeastern reimbursement and Umass tuition cost & it’s corresponding reimbursement in this year to offset those tuition costs I won’t receive a reimbursement for.

Sure, I could have received an extra $200 this year and then put it in my 6% HSBC savings account but it would have meant a much larger tax windfall next year.

What do you think I should have claimed? Do you see any flaws in my reasoning? Do you know of any other methods to compute tuition costs & fees for tax purposes? If, so please do share!