Education Tax Credits
If you, your spouse or one of your dependents paid for higher education or post-secondary expenses in 2012, you may qualify for one of these education tax credits (below this article): The American Opportunity Tax Credit or the Lifetime Learning Credit. These credits are available to help you pay for tuition or other related school expenses, as long as you didn’t pay for them with tax-exempt scholarships. The American Opportunity Tax Credit covers expenses during the first four years of post-secondary education. To qualify, the student must be studying towards a degree; enrolled in school at least part-time during the academic period; and not have been convicted of any drug-related offense.
The Lifetime Learning Credit is not as generous as the American Opportunity Tax Credit, but it is available for students who paid for any expenses related to qualified post-secondary education, whether it was a four-year program or not. Similar to the American Opportunity Tax Credit, this credit can be claimed for tuition and enrollment expenses. You can also claim expenses for required books or equipment if you paid the school directly for them.
| American Opportunity Tax Credit | Lifetime Learning Credit | |
| Maximum Credit | $2,500 per student | $2,000 per household |
| Maximum Modified Adjusted Gross Income (MAGI) | $90,000 if single, widow or head of family ( $180,000 if married and filing jointly ) | $62,000 if single, widow or head of family ($124,000 if married and filing jointly) |
Some expenses that are not eligible for these credits include expenses related to housing, insurance, transportation, medical expenses and others that are not directly related to the completion of any type of post-secondary studies. TurboTax can help you determine which credit will provide you with more benefits and which expenses you can include when claiming the credit.
Saver’s Credit
If you have followed the wise advice of saving for your retirement and you have low or moderate income, the IRS could reward you with up to $1,000 ($2,000 if married and filing jointly) to help you save for your future. Contributions to investment accounts for retirement such as an IRA, Roth IRA, 401 401(k), 403(b), 457(b) and other voluntary contributions could help you meet the requirements to receive this credit, including:
- You must be at least 18 years old
- You cannot be claimed as a dependent by someone else
- You cannot be a full-time student
- You can claim up to 10%, 20% or 50% for the first $2,000 you saved
- The credit amount depends on your adjusted gross income, which cannot be more than:
- $28,750 if you file as single, married filing separately, or widowed
- $43,125 if you file as the head of a family
- $57,500 if you file as married filing jointly
Jim Wang for Intuit writes: Back-to-School: Education Tax Benefits to Offset Education Costs
College is expensive. With student loans rivaling mortgages and other debt for most young professionals, it’s easy to see why it’s a big subject of discussion. Tuition, fees, books, housing, food, and the costs of attending universities are on the rise. My own alma mater, Carnegie Mellon University, was “only” $30,000 when I enrolled in 1998, a princy sum even back then (generous grants and student loans helped a lot). Today, it costs over $60,000 a year! That’s insanity.
If you are looking for a way to offset some of your education costs, the government offers some tax credits and deductions designed to help students and their parents. While these tax breaks won’t completely cover the cost college, they can reduce some of the pain involved.
American Opportunity Tax Credit
The American Opportunity Tax Credit is offered to students who pay qualified tuition (and aren’t claimed as dependents elsewhere), as well as to parents who pay expenses for their dependent students or themselves. Replacing the Hope Credit, the American Opportunity Credit offers some modified rules, which make it available to more students. Normally, the Hope Credit only allowed you to use it on the first two years of post-secondary education, and the modification allows for up to four years, as well as raising the income limits, and expanding qualified expenses.
The popular American Opportunity Credit was set to expire at the end of 2010. However, it has been extended through the end of 2012. This tax credit allows you to claim up to $2,500 per student. The full credit is available for individuals with a MAGI(Modified Adjusted Gross Income) of $80,000 or less, $160,000 for married filing jointly. It is 40% refundable, meaning that you can get up to $1,000 back even if you don’t owe taxes.
Lifetime Learning Credit
Rather than limiting your ability to get tax credits for education expenses for the first four years of college, it’s possible to use the Lifetime Learning Credit to offset your expenses even in graduate or professional school. As long as the educational institution is qualified, undergraduate or beyond, you can qualify for up to $2,000 in tax credits for your expenses. It’s figured on 20% of your tuition and fees, up to the first $10,000. There is a phase out as you reach certain income levels. Parents can claim this for dependent students.
Deduction for Tuition and Fees
Unlike the credits, which are dollar for dollar reductions in how much tax you owe, deductions reduce your income. You still receive a benefit; it just isn’t as pronounced. You can take a deduction for up to $4,000 spent on college tuition, and on related expenses.
Limitations to These Tax Breaks
Realize that there are limitations to the tax breaks you can take. If you claim the Tuition and Fees Deduction, you can’t take any of the credits. Additionally, you can’t claim the American Opportunity and Lifetime Learning credits for the same student in the same year. If you are a parent with multiple dependent students, you can spread these credits around a little bit to maximize your return.
Carefully consider your tax situation as you decide what is best. Remember that a credit is far more valuable than a deduction. For example, a $2,000 tax credit means a direct $2,000 reduction in tax liability. A deduction reduces your taxable income, so assuming you are in the 25% tax bracket, you would need a $8,000 deduction to get the same reduction in liability as a $2,000 tax credit.
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