The trees may still be green, but the mornings are starting to give that little bit of chill that signals the color change is not far off. This time of year in Minnesota is known for two major things; The Minnesota State Fair and Back-to-School.

While the Minnesota State Fair is probably the preferred topic for some, this month we are focused on back-to-school and the possible tax benefits that come with it. From Minnesota’s K–12 Education Credit and Subtraction to college tax credits and education savings accounts, understanding the rules can help families make the most of their education spending.

K–12 Education Expenses

School Supplies & Clothing

Items like notebooks, pencils, and clothes are generally not tax-deductible at the federal level. However, Minnesota specifically allows many required educational materials, including paper, pens, pencils and notebooks, to qualify for its K–12 Education Credit or Subtraction. More about that next.

Minnesota-Specific Credits

Minnesota families may be able to take advantage of two state tax benefits for qualifying K–12 education expenses. The K–12 Education Subtraction has no income limit and allows families to subtract up to $1,625 per qualifying child in grades K–6 and $2,500 per qualifying child in grades 7–12. The K–12 Education Credit is income-based and may provide a credit equal to 75% of qualifying education expenses, subject to applicable limits. Eligibility for the credit phases out based on income, with the current adjusted gross income (AGI) limit beginning at $81,820 for families with one or two qualifying children.

College Savings Benefits

529 Plans

Contributions to 529 plans are not deductible on your federal tax return, but earnings can grow tax-free when distributions are used for qualified education expenses. Minnesota taxpayers may also qualify for either a state tax credit or subtraction for contributions to a 529 plan. The subtraction is available for contributions of up to $1,500 for individual filers or $3,000 for married couples filing jointly, while the income-based credit can be worth up to $500.

Keep in mind that Minnesota’s rules for qualified 529 plan expenses do not always align with federal rules. Recent changes have also expanded how 529 funds may be used, making it important to consider both federal and Minnesota tax treatment when taking a distribution.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) offer another tax-advantaged way to save for education. Contributions are not tax-deductible, and total contributions are generally limited to $2,000 per beneficiary each year, with income limits applying to contributors. Earnings can grow tax-free, and qualified distributions may be used for eligible elementary, secondary and higher education expenses.

Higher Education Tax Credits

If you have a student entering college, keep these in mind:

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) can provide a credit of up to $2,500 per eligible student each year for qualified education expenses. The credit is generally available for the first four years of postsecondary education, and up to $1,000 of the credit may be refundable, meaning eligible taxpayers could receive a portion of the credit even if they owe no federal income tax. Income limits and other eligibility requirements apply.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) can provide a credit of up to $2,000 per tax return for qualified education expenses. The credit may be used for undergraduate, graduate and professional degree courses, as well as courses taken to acquire or improve job skills. Unlike the American Opportunity Tax Credit, the LLC is not limited to the first four years of higher education and there is no limit on the number of years it can be claimed. The credit is nonrefundable, meaning it can reduce the amount of tax owed but will not result in a refund if the credit exceeds the taxpayer’s tax liability. Income limits and other eligibility requirements apply.

Dependent Care & After-School Programs

Child and Dependent Care Credit

If you pay for before- or after-school care for a qualifying child under age 13 so that you (and your spouse, if applicable) can work or look for work, a portion of those expenses may qualify for the federal Child and Dependent Care Credit. Keep in mind that educational expenses, such as school tuition, do not qualify simply because the education or program takes place outside of regular school hours.

Other Considerations

Scholarships & Grants

Scholarships and grants are generally tax-free when used by a degree candidate for qualified education expenses, including tuition, required fees, books, supplies and equipment. However, amounts used for nonqualified expenses such as room and board or travel are generally considered taxable income.

Student Loan Interest Deduction

Taxpayers who are repaying qualified student loans may be able to deduct up to $2,500 of student loan interest each year, subject to income limits and other eligibility requirements. This is an adjustment to income, sometimes referred to as an “above-the-line” deduction, which means you do not need to itemize deductions to claim it.

Not every education-related expense carries a tax benefit, but knowing which ones do can help you maximize your opportunities. At SDK, we know every family’s situation is unique, and we are here to help you plan ahead and navigate complex issues. Reach out to our team today at info@sdkcpa.com or 612-332-5500.