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College Tax Benefits for 2012 and Years Beyond

By: Chuck Strauss

February 28, 2013

Parents and students: now is a good time to see if you qualify for either of two college education tax credits, or any of several other education-related tax benefits.

Generally speaking, the American Opportunity Tax Credit, Lifetime Learning Credit, and tuition and fees deductions are available to taxpayers who are paying qualifying expenses for an "eligible student". Eligible students include the primary taxpayer, the taxpayer’s spouse, and/or a dependent of the taxpayer.

So if you are the parent of a college student, and you are also a college student yourself, you will often qualify for more than one of these benefits. But, you can only claim one of them for a particular "student" in a particular year. These benefits are available to all taxpayers – both those who itemize their deductions and those who claim a standard deduction. The credits are claimed on special forms, discussed later.

The American Opportunity Credit (AOC)

The American Taxpayer Relief Act (ATRA) of January, 2013, has extended the American Opportunity Credit (AOC) for another five years, until the end of 2017. (This 2013 legislation also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013.) These changes make the benefits available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Required course materials are now added to the list of qualifying expenses.  The AOC can be claimed for four post-secondary education years. Many of those eligible qualify for the maximum annual credit of $2,500 per student (a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000).

The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.

Note that the AOC is 40% refundable, which means that the taxpayer can get a refund if the amount of the credit is greater than the tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the AOC, the limit on the LLC applies to each tax return, rather than to each student. Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills.

The credit equals 20% of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.

Income limits are lower than under the AOC. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, heads of household and some widows and widowers with a MAGI of $62,000 or more.

The LLC is a nonrefundable credit that is based on the amount the taxpayer or dependents paid for qualified tuition and related expenses for eligible students in 2012 and the amount of the taxpayer's MAGI.

Tuition and Fees Deduction

Like the LLC, the tuition and fees deduction is available for all levels of post-secondary education, and the cost of one or more courses can qualify. The annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less, and for singles, heads of households and some widows, widowers and other taxpayers whose MAGI is $62,000 or less. The deduction limit drops to $2,000 for couples whose MAGI exceeds $130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds $65,000 but is no more than $80,000.

(Eligible parents and students can get the benefit of these provisions during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.)

Summary

For those eligible, including most undergraduate students, the AOC will yield the greatest tax savings.  Alternatively, the LLC should be considered by part-time students and those attending graduate school. For others, especially those who don’t qualify for either credit, the tuition and fees deduction may be the right choice.

All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. None of the benefits can be claimed by a nonresident alien or married person filing a separate return. In most cases, dependents cannot claim these education benefits.

Normally, a student will receive a Form 1098-T from their institution by the end of January which will show information about tuition paid or billed along with other information. However, taxpayers should be aware that amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax benefits. Careful records of expenditures should be kept. Taxpayers should see the instructions to Forms 8863 and 8917 and Publication 970 for details on properly figuring allowable tax benefits.

 
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