Education Credits - Who Gets the Benefit?

• Posted on April 24, 2008
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Long Island CPA Firm Offering Tax and Financial Advice

When it comes to who gets the benefit of the education credits, it might not be who you would expect. The IRS has provided clarification as to who can claim the education credits. These are credits allowed for qualifying higher education costs for yourself, your spouse, or your dependents. Under the latest rules, if a third party—i.e., someone other than you, your spouse or claimed dependents—pays tuition and related fees directly to a college, the student is treated as having made the payment directly. To further confuse you, expenses made by a student are treated as made by the taxpayer who claims the student as a dependent. Thus, if a divorced parent pays tuition on behalf of a child but the other parent has custody of the child and is eligible to claim the child as a dependent, the custodial parent is treated as paying the tuition directly to the college. Thus, the custodial parent could claim the credit.

Another added complexity: For purposes of claiming education credits, taxpayers can choose not to claim dependency exemptions for their student children. Then the student can claim the education credit on his/her own return. This could be beneficial, for example, if the parents have a gross income too high to actually get a tax break from the credit. A BIG drawback to this approach: Neither the students nor the parents can claim a dependency exemption for the student.