Written by Marc R Barnes EA
September 03, 2012

With kids going off to college in September, the fact of higher educational costs is now impossible to ignore. As you or your child navigate campus, you are now in position to start navigating the possible tax implications of your new-found college expense. Outlined here are three of the more popular ways to reduce your taxes in 2012 as a result of this educational expense burden.

Who Qualifies:

Typically you, your spouse, or a dependent that can be claimed as an exemption on your individual tax return

Qualified Expenses:

Tuition and fees, course related books, supplies and equipment

Common Tax Benefits:

  1. American Opportunity Credit.
    • Amount of Credit: $2,500 per eligible student at an eligible institution ( 100% of initial $2,000 and 25% of the next $2,000)
    • Frequency: Available for the first four years of post-secondary education
    • Comments: In 2012, 40% of this credit is a “refundable” credit. This means you can receive up to $1,000 even if you owe no federal income taxes.
  2. Lifetime Learning Credit.
    • Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 of eligible expenses)
    • Frequency: No limit on number of years you can claim the credit
    • Comments: The income limits for this credit are much lower than for the American Opportunity Credit.
  3. Student loan Interest Deduction.
    • Amount of Deduction: Reduce up to $2,500 of your income subject to tax
    • Frequency: Per taxpayer per year.
    • Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions.

Tips to Maximize your Tax Benefit

  • The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple, eligible students, the American Opportunity may be a better choice.
  • Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits.
  • You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits.
  • Gifts, bequests, or inheritances do not reduce your eligible expenses.
  • Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return.
  • Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts you could subject yourself to a 10% tax penalty.

Remember, like most tax provisions, these benefits are all subject to income limitations. For 2012 they are:

Educational Benefits:

2012 Modified Adjusted Gross Income Phase-outs

Filing status American Opportunity Credit Lifetime Learning Credit Student Loan Interest
Single
$80,000 90,000
$52,000 62,000
$60,000 75,000
Married Filing Joint
160,000 180,000
104,000 124,000
120,000 150,000

 

Topic: College