Paying college expenses?

You may be eligible for a valuable credit or deduction

Are you currently paying higher education expenses? If so, you may be eligible for a valuable tax credit or deduction.

The credit can take the form of either the American Opportunity credit (a temporary expansion of the Hope credit) or the Lifetime Learning credit. The deduction, as of this writing, is available only for the 2009 tax year, though it may be extended. Let’s take a closer look at each.

The American Opportunity credit

The American Opportunity credit is available for 100% of the first $2,000 in qualified tuition and related fees (including books) for an eligible student and 25% of the next $2,000, for a maximum credit of $2,500 per student. To qualify, the expenses must be for the first four years of a post secondary education.

Bear in mind, for 2009 and 2010 the American Opportunity credit begins to phase out for joint filers with modified adjusted gross incomes (MAGIs) over $160,000 and for other filers with MAGIs over $80,000. It phases out entirely at a $180,000 MAGI for joint filers and $90,000 for other filers.

If you’re paying for higher education beyond the first four years, you may be able to claim the Lifetime Learning credit. It’s available for 20% of qualified tuition and fees up to $10,000, for a maximum credit of $2,000 per student. The students don’t have to be enrolled in a degree or certificate program. So it may apply to graduate courses, continuing professional education or job-skills courses.

For 2009 and 2010, phase out limits apply to joint filers with MAGIs between $100,000 and $120,000 and to other filers with MAGIs between $50,000 and $60,000. The credit isn’t available to those with MAGIs equaling or exceeding the top of the applicable range.

The deduction

The education deduction applies to qualified expenses paid during 2009 in connection with enrollment at an eligible institution during 2009 or for an academic term beginning in 2009 or in the first three months of 2010. If eligible, you can deduct up to $4,000 of qualified college tuition and fees per taxpayer.

The deduction is capped at $2,000 for joint filers with MAGIs of $130,000 to $160,000 and other filers with MAGIs of $65,000 to $80,000. If your MAGI exceeds those amounts, you cannot claim the deduction. You also can’t claim both the deduction and a credit for the same student. Also, as mentioned above, this deduction is scheduled to expire following the 2009 tax year unless extended — check with your tax advisor for the latest information.

The benefits

If you’re eligible for all, the American Opportunity credit will likely provide the greatest benefit because it can save you as much as $2,500 in federal income taxes compared with the maximum Lifetime Learning credit savings of $2,000 and the maximum deduction, which would probably save you at most $1,000 in taxes.

If you’re paying for a fifth or later year of college or for graduate school or continuing education expenses, the Lifetime Learning credit can potentially be beneficial — but keep in mind that the MAGI phase out ranges are lower than those for the other two breaks. If your MAGI is too high, check to see if you may be eligible for the education deduction. (Of course, for 2010, you’ll also need to check whether the deduction has been extended.)

If your income disqualifies you from claiming these breaks and your children pay their own education expenses, they may be able to take advantage of them — as long as you don’t claim them as dependents. In many cases, the tax benefits to children outweigh the value of the dependency exemption to their parents.

An important subject

As you can see, it’s important to determine which tax break or breaks you’re eligible for. Gather your qualifying information carefully and ask your accounting firm to confirm which course of action you should take.

Please contact Feeley & Driscoll's forensic accountants by Email or call 1 (888) 875-9770 to learn more.

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