Tax Benefits for Education

By Vincent Salvagni, CPA (Mar, 2010)

With the ever changing times comes an ever changing tax code. And with college tuition on a steady rise to unaffordability, something's got to give. Introducing…the American Opportunity Tax Credit. 

"Taking Credit for Getting Credits"

In February of 2009, Congress passed the American Recovery and Reinvestment Act (ARRA) to stimulate our ailing economy. A major part of this act was a modification to an existing education credit (the Hope Credit) in the form of the American Opportunity Credit. This new and improved refundable tax credit broadens the range of taxpayers who meet the qualifications, allows for additional qualifying expenses, and extends the length of coverage to the first four years of post-secondary education.

The $2,500 credit is available to taxpayers (or taxpayer's dependents) who incur qualifying post-secondary education costs during 2009 and 2010 and whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit phases-out completely at $90,000 and $180,000, respectively. Taxpayers who qualify for the full credit will recognize a reduction of their 2009 and/or 2010 income tax equal to 100% of the first $2,000 of tuition, fees and related course materials plus 25% of the next $2,000 of the same type of expenses. What is even better is that this credit is partially refundable; so if your other credits and deductions reduce your income tax to zero, the government will send you a refund for up to 40% of the American Opportunity Credit. To be eligible for the credit, the student must be pursuing an undergraduate degree or other recognized education credential and must be enrolled at least half-time for one academic period and must be enrolled at least half-time for one academic period.

"Old Faithful's"

For those who are beyond their first four years of post-secondary education, there are still plenty of government incentives for you to go back and get that additional degree. The Lifetime Learning Credit and the Tuition and Fees Deduction are still available for anyone seeking to expand their knowledge base.

The Lifetime Learning Credit is a non-refundable credit of up to $2,000 for qualified education expenses for any student enrolled in an eligible educational institution. Modified adjusted gross income limitations of this credit begin at $50,000 ($100,000 for married couples filing a joint return) and it completely phases out at $60,000 and $120,000, respectively. The credit is equal to 20% of the first $10,000 of qualified expenses per tax return; therefore, the maximum credit available for all qualified students is $2,000 per return.

The Tuition and Fees Deduction is taken as an adjustment to income on page one of your form 1040, meaning it is available even if you do not itemize your deductions. You are allowed to deduct up to $4,000 of qualified expenses thereby reducing your taxable income. Income limitations start at $65,000 ($130,000 for married couples filing a joint return) and complete phase-out occurs at $80,000 and $160,000, respectively. The deduction is available to you or your spouse for expenses that you pay as well as expenses you pay on behalf of your dependent for whom you claim an exemption on your tax return.

"Maximize, Maximize, Maximize"

With so many options available for each person incurring educational expenses, it is important to make sure you are maximizing your benefit. In the case where multiple individuals are attending post-secondary institutions at the same time, combinations of credits and deductions should be carefully analyzed to ensure that you are paying the least amount of tax.

For any of the American Opportunity Credit, the Lifetime Learning Credit, or the Tuition and Fees Deduction, you should receive a Form 1098-T (Tuition Statement) from the educational institution that will provide much of the information needed for the preparation of your tax return. The 1098-T should disclose the amounts billed for tuition and related expenses, the amount you paid, and scholarships or grants received. Loans taken out for education purposes qualify as payment for the year that the qualified expenses were incurred…and better yet…the interest on those loans could be deductible when you start paying them back.

At Dermody, Burke & Brown, CPAs, LLC, we take great pride in our ability and desire to keep our clients educated. Should you have any questions regarding this subject or others, please do not hesitate to contact us.

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