Whether you’re a recent high school graduate going to college for the first time or a returning student, paying for college can be a daunting financial task for parents and student. The following are some tips about education tax benefits that can help offset some college costs for students and parents.
American Opportunity Credit – In many cases, this credit offers greater tax savings than other existing education tax breaks! Here are some key features of the credit:
- Tuition, related fees, books, and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- If you otherwise qualify, you can take this credit, even if you have previously taken the Hope or Lifetime Learning credit in years prior to 2009.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the former Hope and the current Lifetime Learning credits.
- Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of the credit of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, which is commonly referred to as the kiddie tax.
Although most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. Limitations include a married person filing a separate return, regardless of income; joint filers whose MAGI is $180,000 or more; and, finally, single taxpayers, heads of household, and certain widows and widowers whose MAGI is $90,000 or more.
Some post-secondary education expenses do not qualify for the American Opportunity Credit. These include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college, as the credit is only granted for the first four years of post-secondary education. However, for those students who qualify, the Lifetime Learning Credit may be claimed instead.
Lifetime Learning Credit – If the student does not qualify for the American Opportunity Credit, he or she may still qualify for the Lifetime Learning Credit. Key features of the credit include the following:
- The big difference is that there is no limit on the number of years that the Lifetime Learning Credit can be claimed for an eligible student.
- The credit amounts to up to $2,000 per eligible student.
- It is also available for all years of post-secondary education and for courses taken to acquire or improve job skills.
- The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
- The student does not need to be pursuing a degree or other recognized education credential.
- Qualified expenses include tuition and fees, course-related books, supplies, and equipment.
- The full credit is generally available to eligible taxpayers who make less than $52,000, or $104,000 for married couples filing a joint return. Above these amounts, the credit quickly begins to phase out.
Only one type of education credit can be claimed per student in the same tax year. However, if college expenses were paid for more than one student in the same year, each student can take either credit. For example, the American Opportunity Credit can be claimed for one student and the Lifetime Learning Credit for the other student. Note, however, that the Lifetime Learning Credit $2,000 cap applies on a per tax return basis.
The credit is claimed in the return of the individual who claims the student’s exemption. For example, if a student’s parents are divorced and the father pays the tuition but the mother claims the student’s exemption, the mother would receive the credit, even though the father made the payments.
Student loan interest deduction – Generally, personal interest that you pay, other than certain home mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even without itemizing deductions.
Without Congressional intervention, 2012 is the final year for the American Opportunity Credit; thus, it may be an appropriate strategy to pre-pay the tuition for school terms beginning during the first three months of 2013 in order to maximize the credit for 2012. Applying this and other education strategies can be complicated and requires planning in advance. For assistance with these and other tax planning issues, please give this office a call.