Tax Tips for Students and Parents Paying College Expenses

Whether you’re a recent high school graduate going to college for the first time or a returning student, paying for college can be a daunting financial task. The following are some tips about education tax benefits that can help offset some college costs for Students and Parents Paying College Expenses:

American Opportunity Credit—In many cases, this credit offers greater tax savings than other existing education tax breaks. Here are some key features of the credit:

• Tuition, related fees, books, and other required course materials generally qualify.
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• You may qualify for this credit even if you have previously taken the Hope or Lifetime Learning credit.
• The full credit is available for 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. These income limits are higher than those under the Lifetime Learning credit.
• Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parents’ rate, which is commonly referred to as the kiddie tax.

Although most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. Limitations include a married person filing a separate return, regardless of income; joint filers whose MAGI is $180,000 or more; and, finally, single taxpayers, heads of household, and certain widows and widowers whose MAGI is $90,000 or more.

Some post-secondary education expenses do not qualify for the American Opportunity Credit. These include the expenses of a student who, as of the beginning of the tax year, has already completed the first four years of college, as this credit is only granted for the first four years of post-secondary education.

If you have any questions about whether you can claim either of these two credits, and deciding on which would benefit you most, give us, Bressler & Company, at call at 559.924.1225.