One of the most "under-collected" credits in the US tax system is an "education credit". This is due to two common myths:
1. All professionals are the same. Price doesn’t reflect the quality. The cheaper, the better. Have we all forgotten about how competitive tax preparation business is?
2. Why contact a tax professional if you can do it cheaper (and even free) using a tax preparation program?
As for the first myth, more than half of reviewed tax returns that were prepared in 2016 by tax preparers, did not give students a full "education credit", to which they were entitled.
In order to debunk the second myth, we took the data of one student and prepared two tax returns. One was done with the help of a widely advertised tax preparation program, and the second declaration was made by us using our knowledge of the IRS rules for education credit.
A student of 20 years of age, lives alone, has a job and received W-2 (wage $ 15,700; federal income tax withheld $ 1,565; SS withheld $ 973; Medicare $ 228; state tax withheld $ 141); form 1098-T:
- scholarship - $ 10,300;
- education expenses - $ 7,000.
That's what we got using one of the most popular consumer tax preparation programs:
Below is the same example with the difference of understanding of how the education credit works and the correct way of inputting it into the system.
California State Refund:
As we see, the difference is $ 1,783. This is how much tax payer lost by using a tax preparation software. Knowledge is gold!
The truth is that the IRS wants everybody to file their tax returns and makes a lot of resources, including the free ones, available. It works for tax payers
with very simple returns. Consumer tax preparation programs are not designed or capable to process more complicated cases and cannot incorporate the complexity of all tax rules. You may save money on a professional tax preparer, but loose on underestimating your deserved credits.
If you or your children received college grants and you did not receive "education credit", contact a professional that understands the complexity of this credit. If you had your education credit underestimated, a tax professional may correct your past tax returns and either increase your refund or decrease your liability for the omitted amount for the past three years.
Did you receive your "education credit" in full?