College Education Expenses?
Look at the following four education tax benefits:
(1) The American Opportunity Tax Credit (AOC)
The AOC is larger in scope than the old Hope Credit and is now the prime education tax benefit to choose. The AOC can be a credit
of up to $2,500. The other thing is that the Hope could only
be used for the first two years of school, the AOC is good for all four years. This is a huge improvement.
One really nice thing is that the AOC is a tax credit just like the previous Hope Credit but also with the AOC you can even get
a refund back of up to $1,000 from the government. You could not from the old Hope. For example, if you calculate out the tax you
owe in April for the recent tax year and you owe $1,500 but then you qualify for the full AOC of $2,500 credit; then you would
actually get a thousand bucks from Uncle Sam. The limit you can get a check back is 40% of the AOC; [40% x $2,500 = $1,000 max].
Keep in mind the American Opportunity Credit was extended through 31 December 2017 as part of the American Tax Payer
Relief Act of 2012. This ATPRA of 2012 actually passed congress and was signed by the president in the first couple of days of January 2013.
The math above is intended to illustrate that $1,000 is the highest check you can possibly get back from the government. Looking at another example: your tax
liability was $1,300 and you qualified for the full AOC credit of $2,500. In this case you do not have to pay but you do not get the full $1,200 dollar
difference back as a check from Uncle Sam. Since the limit is $1,000 you only get the thousand bucks refund check. There is
a worksheet available that gives you the right answer if your situation is some oddball number of tax liability and/or amount
of AOC credit.
The last AOC thing to know is how to qualify for the max AOC instead of a smaller amount of AOC. You must spend at least
$4,000 on qualifying expenses to get the max $2,500 AOC credit. What expenses are qualifying expenses? Obviously tuition
and fees. In a departure from previous tax incentives to encourage higher education, the AOC allows other expenses to also
qualify. Books and even other course matierials which some professors will require will qualify. For example, if a professor
requires you to have some special little software package that you have to buy.
(2) Tax Deductions for Tuition and Fees
Lets say you cannot take the AOC tax credit. You can still take the normal deduction up to $4,000 (or the amount you spent
on tuition and fees, if less than $4,000). This tax deduction is not as good, obviously as the AOC tax credit. But it can still
have a substantial impact on your tax burden. Let’s say you are in the 25% tax bracket. Your actual $ savings to you is then 25%
of the deduction amount so if you get a $4,000 tax deduction, you are actually $1,000 richer in real money when all is said and done.
The American Tax Payer Relief Act of 2012 extended the sunset of many so called “tax extenders” among those extended were both
the deduction for tuition and fees and the deduction for interest paid on student loans. The ‘ATPRA of 2012’ extended both of these
deductions through 31 December 2017.
Just in case it is not already clear, there is no double dipping allowed. You cannot take both the AOC and the tuition tax
deduction for the same student in the same tax year. You can choose either the AOC. Or you can choose the normal deduction up
to $4k. But you cannot take both. You may be able to take the tuition and fees tax deduction if you, your spouse, or a dependent
you claim on your tax return was a student enrolled at or attending an eligible educational institution. The deduction is based
on the amount of qualified education expenses you paid for the student in the academic school year for academic
periods beginning in the academic school year and the first 3 months of the following year.
Generally, in order to claim the deduction for qualified education expenses for a dependent, you must have paid the expenses
in the academic school year and must claim an exemption for the student as a dependent on your tax return (line 6c of Form 1040
or 1040A). For additional information, see chapter 6 of Pub. 970. You cannot claim the tuition and fees deduction if any of the
• Your filing status is married filing separately;
• Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even
if the other person does not actually claim that exemption;
• Your modified adjusted gross income (MAGI), as figured on
line 5, is more than $65,000 ($130,000 if filing a joint return);
• You were a nonresident alien at any time during the academic school year;
(3) Student Loan Interest Tax Deduction
For those of you who are now in the pay-back phase of your student loan, you get a little break too. The interest portion of
your payments on your stud loan paid during the year is tax deductable. Once again this is a deduction that phases out for higher
income earners. your income is too high. The phaseout is from $50k to $65k for singles and $100k to $130k for joint marrieds.
One other good point about both the tax deduction for tuition and fees and the tax deduction for student loan interest paid is that
they are both above the line deductions. This means you get to deduct them whether or not you itemize your deductions on schedule
A. Even if you just take the standard deduction, you still get these write offs.
(4) The Lifetime Learning Tax Credit
The lifetime learning tax credit is broad in its
applicability. It applies not only to
undergraduates and grad students but also to vocational courses and
schools and even professional level courses. Qualified
expenses on this credit include, as usual, tuition and fees. It also
applies to other course materials such as books and equipment,
but on this credit there is the further stipulation that those expenses
must have been paid directly to the teaching institution itself. So if
you bought the book from the off-campus private
bookstore, you’re out of luck for the cost of that book.
If you or your college bound student is looking
for a complete overview of financing sources to pay for college,
here is a complete, though brief, five page summary covering everything
from federal financing sources to alternative and creative ways to pay for school.
Reasons why a person may not qualify for the AOC (American
(1) If your adjusted gross income is over 80k for individuals or 160k for
marrieds, the credit begins to phase out
(2) The student is enrolled less than half-time
(3) The student is in more than his fourth year of post secondary education. — You
only get four years to work on your degree on this government program. If
you’re on the five or six year plan, you don’t get this credit for the extra years.
One final AOC observation:
For higher income households, where the income level is so high that
you are phased out of not only the AOC but your exemptions for each
dependent begin to phase out, it could be more beneficial in some
cases for the parent/guardian taxpayer to not claim the normal tax
exemption for the student and thereby allow the student herself to
claim the AOC credit on her tax return.
There can be situations where the overall tax burden, counting both the
income tax on the students and the income tax on the parents households
together could be optimized in this fashion. If you believe this
situation may apply to your family you could calculate out both tax
returns both ways and see which way let’s you keep the most of your