MAKING THE MOST OF COLLEGE TAX BREAKS
Some parents spend years saving for their children’s college education, while others scramble to search out scholarships and loans at the last minute. No matter which approach you’ve taken, there are a number of tax breaks available for qualifying taxpayers paying education bills. Don’t miss out on this opportunity to offset your education costs.
GREAT TAX CREDITS: Tax credits are a valuable tax break because they reduce the amount of tax you owe. That generally has a bigger impact than a tax deduction, which simply lowers the amount of your taxable income.
To qualify for an education tax credit, you must be a taxpayer who has paid taxes in the most recent year.
To understand how it works, assume that a family had one dependent who was in her first year of college, and that they owed $5,000 in taxes for the year. If they qualify for the highest credit amount, they would be able to reduce their taxes owed by $2,500 to $2,500.
THE AMERICAN OPPORTUNITY CREDIT: The American Opportunity Credit can be claimed for four post-secondary education years and required course material costs are included as qualified expenses.
This credit of a maximum of $2,500 per srtudent is available to individuals with income of $80,000 or less or $160,000 for married couples who file a joint return. The credit is phased out for higher incomes.
THE LIFETIME LEARNING CREDIT: The Lifetime Learning Credit is another popular tax break. It's possible to qualify for the Lifetime Learning Credit while taking one or more courses to improve or gain new job skills. The Lifetime Credit can amount to as much as 20% of the first $10,000 of qualfied educational expenses. So, those who qualify can receive as much as $2,000 per year for the total qualified expenses paid for yourself, your spouse or your dependents.
The Lifetime Credit applies for all the years of postsecondary education or for courses taken to enhance job skills, while the Hope Credit is only available for the first two years of postsecondary education. Phaseout limits are as follow: $51,000 to $61,000 if you are filing as a Single, Head of Household, or Qualifying Widow and $102,000 to $122,000 if your are Married Filing Jointly.
REMEMBER DEDUCTIONS, TOO
Taxpayers with incomes too high to benefit from the American Opportunity Credit or Lifetime Learning Credits may be able to take advantage of the tuition and fees deduction. For 2011, you qualify for the maximum deduction of $4,000 if your modified adjusted gross income (MAGI) is not more than $65,000 for single filers and $130,000 for married taxpayers filing jointly. If you're a single filer and your MAGI is more than $65,000 but not more than $80,000, your deduction is limited to $2,000. The $2,000 deduction also applies to joint filers whose MAGI is higher than $130,000, but not more than $160,000.
No tuition and fees deduction is allowed if your MAGI exceeds $80,000 for single filers and $160,000 for joint filers.
GET MORE INFORMATION
To get more information on education-related tax breaks, visit the Internal Revenue Service Web site at www.irs.gov. In addition, your local CPA can help you make the most of the options available to you. Consult him or her about all your family’s financial needs.
