It’s early Sunday morning, and the week-long silence is broken by the sound of Mr. Smith’s cell phone on his bedside table. It’s the hospital calling about her daughter, injured and in intensive care.
Mr. Smith rattles off question after question about how his daughter is doing with only vague generalities in response. The attending physician asks if Mr. Smith has HIPAA clearance or substitute health care for his daughter. Mr Smith ignores the question and repeats his concerns about his daughter’s injuries. The doctor continues to sidestep the issue and return to what appears to be a pointless discussion of legal documents. How is it possible ?
Lots of changes when your child turns 18 and go to college. Going out alone is a huge stepping stone to achieving individuality, but what most parents and students don’t realize is that there are huge legal changes that happen when your child becomes an adult.
When your child turns 18, you can no longer make legal decisions for them or retrieve information about them that is considered private without their written permission. And unfortunately, there is not just one legal document to solve this problem. In fact, there are four essential documents that every adult should prepare. These key legal instruments can help make any unforeseen circumstances your family faces feel a little less burdensome.
ORGANIC | Jamie Hargrove, CPA, Lawyer
Power of attorney for health care
Also known as a health care proxy, this document gives parents the ability to make decisions about their child’s health care. If a student is attending school out of state, it is prudent to have a health care proxy from both states, as some medical professionals may be reluctant to accept an authorization form that they do not have. not recognize.
This document allows healthcare professionals to share a student’s otherwise confidential health information with the person or persons the student desires.
living will statement
Sometimes called a advanced care directive, the living will statement is an essential document that, according to a 2020 Gallup poll, less than half of the American adult population has. This essential document does the following:
- Tells doctors and medical teams, as well as family members, how a patient wants medical care to be handled in a critical situation. It clarifies the patient’s values and what is important in treatment, especially when conditions are life-threatening.
- Protects patients from unwanted and, in some cases, unnecessary medical interventions that can only prolong death and lead to continued pain and suffering.
Financial power of attorney
When parents want to help manage their child’s finances, this document may authorize them to do so. It allows parents to act on behalf of a child in all financial matters. A financial power of attorney can be useful in many situations. For example, if a student has an accident or falls ill, leaving them temporarily or permanently unable to make financial decisions, a designated person can step in to manage bank accounts, file tax returns, make loan repayments, etc.
As mentioned earlier, a lot changes when your child turns 18. and go to college. Even if your child has few or no assets, there are health and financial decisions that need to be made and documented. So pack your students’ bags, load the car, fly the school banner and call your lawyer.
Taxes, taxes, taxes
Funding a college education can require significant resources. Fortunately, there are some tax breaks for those footing the bill. Here we will cover tax credits and a deduction for education-related expenses.
Scroll to continue
US Opportunity Tax Credit (AOTC)
A tax credit of up to $2,500 is available per eligible student per year beginning with the 2021 tax year for qualified education expenses (QE). The credit is 100% of the first $2,000 of QE expenses and 25% of the next $2,000 of QE expenses. You may qualify for the credit if your modified adjusted gross income (MAGI) for 2022 is $90,000 or less ($180,000 or less for joint filings of married persons). (For most people, MAGI is simply their adjusted gross income.)
Also, unlike the LLC discussed below, a portion ($2,000 of the $2,500) of the AOTC is a refundable credit. This means that if you don’t owe any taxes, you can get up to $2,000 back from the AOTC. Yes, that means Uncle Sam sends you a check. Pleasant!
It is important to note that there is a maximum limit of four years per eligible student (including years of former Hope Credit claimed).
Lifetime Learning Credit (LLC)
While the AOTC is intended for undergraduate education, the LLC is intended for both undergraduate and graduate education and courses to acquire or enhance professional skills that do not not part of the AOTC. Here are some other differences:
- The AOTC has a four-year limit per student. The LLC has no time limit.
- The AOTC requires at least a half-time registration while the LLC can be for a single course.
- AOTC has a refundable credit while LLC does not. Thus, the LLC can only offset the taxes due.
- For the 2022 tax year, the MAGI phase-out range for AOTC and LLC is the same ($90,000 or less for a single filing and $180,000 or less for a joint filing). To receive the full credit (no phase-out), the amounts are $80,000/$160,000.
- The AOTC is per student, while the LLC is per taxpayer.
Although there is no “double deduction” with the two credits, you can use the credits on the same return as long as they are not for the same expenses and the same student. So you can use the AOTC for expenses for a child entering their freshman year of college while you use the LLC for expenses related to your own online graduate course, for example.
Student loan interest deduction
Even long after a student has passed through the graduation stage, student loan repayments can be a significant budget item. If you pay interest on a student loan, you may be able to deduct up to $2,500 of your interest expense per year. The MAGI-based phase-out starts at $70,000 and is phased out at $85,000 for single filers ($145,000 – $175,000 for married filers filing jointly).
This student loan interest deduction cannot be used for either the AOTC or the LLC. But just as you can take advantage of both an AOTC and an LLC on the same return, you can also take advantage of an interest deduction on your student loans.
In addition to available tax credits and deductions, it is also prudent to consider maximizing tax benefits by planning education expenses early and setting aside funds to invest with tax-free earnings in qualified plans. (such as 529s or Coverdells). Even if you plan to support a grandchild’s education, for example, the tax savings possible by setting aside funds well in advance with qualified plans will easily overshadow the tax credits of funding expenses. studies as they are undertaken.
One of the most rewarding experiences for a parent is sending their child to college after years of preparation. While this can be an exciting time for parents and students, knowing what legal changes to expect can help your family prepare for unforeseen circumstances of all kinds. Similarly, tax incentives for such a large investment in a child’s future can ease the financial burden. As with many major life events, advice from your family’s financial planner, accountant and lawyer can guide you through this transition.
Learn more about our partners at TurboTax:
Editor’s note: The opinions expressed in this article are those of the authors. Content has been reviewed for tax accuracy by a TurboTax CPA expert.