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The quagmire of college finances
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Here's the problem: These tax breaks are way too complicated. They need to be simplified. Our representatives and senators had good intentions, but they created a morass of complex rules and regulations that require an intimate understanding of the tax code. And the tax code is an inscrutable piece of literature that's better left to CPAs and other financial masochists to decipher.

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The GAO report observes that students and their families get a lot of handholding-type of help from the federal government and the colleges they enroll in when it comes to getting traditional sources of funding: namely grants and loans. But when it comes to taking advantage of higher education tax breaks, they're on their own.

The report explains: "They must understand the rules in light of their own situation, identify applicable tax preferences, understand how these tax preferences interact with one another and with federal student aid, keep records sufficient to support their tax filing, and correctly claim the credit or deduction on their return."

Mistakes are common
Unfortunately, families have limited success because they fail to understand all these nuances. The GAO reports that many people who were eligible for the Hope credit, the Lifetime Learning credit or the tuition deduction didn't claim them.

"Among filers who were apparently eligible to claim one of the three tax preferences, 27 percent, representing about 374,000 tax filers, failed to do so," according to the report. "The amount by which these tax filers failed to reduce their tax averaged $169; 10 percent of this group could have reduced their tax liabilities by over $500."

Here's another sad fact: These mistakes weren't solely the fault of taxpayers. About half of the returns containing errors had been prepared by paid tax professionals!

Some taxpayers claimed a Lifetime Learning credit when they would have been better off getting the tuition deduction, or vice versa. It gets even more complicated for folks who wish to use several tax breaks at once, since the use of one may impinge on the ability to use others. For instance, anti-double-dipping rules might prevent families from taking a tax-free distribution from a 529 plan if they also make use of a tuition deduction. (For an example of how this works, see page 25 of the GAO report.)

Tax preparers aren't the only professionals who are capable of making mistakes. Financial planners also see the college-planning terrain as fraught with potential landmines. "A continuously shifting landscape in the area of college financing is causing confusion, an increased risk of giving bad planning advice and high liability exposure for advisers across the country," writes Paula Hogan of Hogan Financial Management in an article published in the Journal of Financial Planning.

 
 
Next: "High-income families should shift assets to their children"
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