Back to School Time!

By: Bethany Pursifull

As college students are heading back to school, it’s a good time to be reminded about what tax benefits are available. There are four tax benefits available for costs of higher education:

1. American Opportunity Credit (formerly the Hope Credit): This is only available for the next two years, 2011 and 2012. You can only claim it for the first four years of post secondary education, so no credit is available for those in graduate school. The credit, which directly reduces the amount of taxes you owe, is the sum of 100% of the first $2,000 and 25% of the next $2,000, for a maximum amount of $2,500. It’s also a partly refundable credit, meaning you can get up to $1,000, or 40% of your total credit, back even if you do not owe any taxes. Another caveat – your modified adjusted gross income (that number on the bottom of page 1 of your tax return) needs to be below $80,000 for single taxpayers and $180,000 for married couples filing jointly. Eligible expenses include tuition, fees, course related books, supplies, and equipment.


2. Lifetime Learning Credit: There is no limit on the number of years you can claim this credit, so even if you or your dependent is in graduate school or taking continuing education classes, you may still be eligible. The amount of the credit is 20% of tuition expenses on the first $10,000. The credit is only available for expenses spent on tuition and fees, and does not include course related materials. The Lifetime Learning Credit is non refundable, so you can only get the credit if you owe taxes. The adjusted gross income limit for this credit is $60,000 for single taxpayers and $120,000 if married filing jointly. Scholarships and Pell Grants must be deducted from the tuition expense before calculating the Lifetime Learning Credit and the American Opportunity Credit.


3. Tuition and fees deduction: This deduction reduces your adjusted gross income, or the amount of income your tax is calculated on. The maximum deductible amount is $4,000 of tuition and fees. Your adjusted gross income must be below $80,000 if filing single and $160,000 for married couples filing a joint return.


4. Student loan interest deduction: Interest paid on student loans can be deducted on page 1 of your return, reducing your adjusted gross income. The maximum amount of interest you can deduct is $2,500. The deduction is available for taxpayers with adjusted gross incomes below $75,000 for single filers and $150,000 if filing a joint return.

For each student, you can only claim one of the credits. If you take one of the credits, you cannot claim the tuition and fees deduction. But if you pay college expenses for more than one student, you can choose different credits or deductions for different students. If you’re married filing separately, you cannot take the American Opportunity Credit, the Lifetime Learning Credit, or a tuition and fees deduction. You can, however, still get a student loan interest deduction.

If you would like more information on this subject, you can contact Bethany at bethany.pursifull@bellandcompany.net.