When you're paying for education, make it pay a little back
The tax code has several ways to claim a tax benefit for the cost of a post-secondary education.
NEW YORK (MainStreet) — The U.S. tax code contains several ways to claim a tax benefit for the cost of “post-secondary” education for you, your spouse or your dependent children.
The most generous is the American Opportunity Credit, an enhanced version of the former HOPE Credit. You can claim 100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000, for a maximum of $2,500.
Qualified expenses include tuition and fees and required course materials such as books, supplies and equipment. To get the maximum credit you must have at least $4,000 in qualified expenses. Forty percent of the credit, a maximum of $1,000, may be refundable.
The credit is phased out based on your “modified” Adjusted Gross Income. The phase-out range is MAGI of between $80,000 and $90,000 for single taxpayers and $160,000 and $180,000 for joint filers. No credit is allowed if you are married filing separate returns.
A student must be enrolled in a program that leads to a degree, certificate or other recognized credential at an accredited educational institution and have taken at least half the normal full-time workload for at least one semester during the year. A student cannot have a felony drug conviction.
The AOC is limited to the first four years of post-secondary education and cannot be claimed in more than four tax years. If you claimed either a HOPE or American Opportunity Credit for the same student in 2008-11 you cannot claim the AOC for that student for 2012.
The Lifetime Learning Credit, none of which is refundable, is available for all years of post-secondary education, including graduate school, and for courses to acquire or improve job skills. The student does not have to be pursuing a degree or other recognized education credential, and it is even available for a single class. There is no limit on the number of years you can claim this credit for a student. The cost of course materials cannot be used in calculating the Lifetime Learning Credit.
The amount of the credit is 20 percent of the first $10,000 in qualified expenses, for a maximum of $2,000. The phaseout range is for MAGI of between $52,000 and $62,000 for singles and $104,000 and $124,000 for married couples. It is not available to married taxpayers who file separately.
The American Opportunity Credit’s $2,500 maximum is per student, but the Lifetime Learning Credit’s $2,000 maximum is per tax return. You can have two dependents in college during the year, and each can claim an AOC of $2,500. But if you have two dependents in graduate school in the same year the maximum Lifetime Learning Credit you can claim on your Form 1040 for both combined is $2,000.
You can also claim an “above-the-line” deduction for qualified tuition and fees. This deduction is limited to $2,000 for modified Adjusted Gross Income of up to $65,000 for singles and $130,000 for married couples filing joint and $4,000 for MAGI of up to $80,000 for singles and $160,000 for joint filers. As with the education credits, this deduction is not available for married taxpayers who file separately.
The deduction is available for tuition and fees, student-activity fees and course-related books, supplies and equipment that are required as a condition of enrollment or attendance at an accredited educational institution. It is available for undergraduate and graduate education.
When determining whether to claim a credit or deduction for education expenses, as in any tax situation where you are given options, you should calculate your tax liability under each option to determine the one that provides the most overall federal, state and local tax savings. A credit provides a dollar-for-dollar reduction of your tax liability. With a deduction, the tax benefit received is determined by your marginal tax rate.
The Lifetime Learning Credit is 20 percent of the tuition paid. The deduction for tuition and fees is the first $2,000 or $4,000 of qualifying expenses. If the amount of qualified expenses totals $5,000, and your level of income allows the maximum credit and deduction, the credit would provide a $1,000 tax savings. A deduction of $4,000 would also provide a $1,000 tax savings for a taxpayer in the 25 percent bracket. But because the deduction is “above the line” there may be some additional tax savings resulting from a reduced AGI. And the deduction may also result in some state tax savings.
For each individual student you can claim either an American Opportunity or Lifetime Learning Credit or the deduction for tuition and fees, but not both.