Taxpayer Relief Act
Tax Benefits for Higher Education
The following information was prepared to inform students about tax benefits which they and their families may be eligible to receive. It is based upon our understanding of the laws and should not be considered an official document. Students should rely upon the advice of their tax accountant or the Internal Revenue Service (IRS) as appropriate. Colleges and Universities are unable to provide students and families with tax advice. For assistance, please contact a tax professional or refer to IRS Publication 970 (Tax Benefits for Higher Education). http://www.irs.gov/publications/p970/index.html
The IRS Publication 970 has been revised for 2012 tax returns. You may review information on the IRS website in the Tax Benefits for Education: Information Center to find more information and updates.http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.
Several new tax benefits are available to help families meet the cost of postsecondary education. These tax benefits are intended to help students and their parents as well as all working Americans to fulfill a variety of educational objectives.
Taxpayers can claim one of the new tax credits if they are eligible, reducing the expenses of putting themselves or their children through college. These tax credits can directly reduce the amount of federal income tax for returns filed in 1999 or later. The Hope Scholarship Credit is available on a per-student basis for the first two years of postsecondary education, while the Lifetime Learning Credit applies on a tax-return basis and covers a broader time frame and range of educational courses. Education expenses paid for with tax-free grants, scholarships, and employer-education assistance are not eligible for either tax credit. Education expenses paid with loans are eligible for these tax credits.
American Opportunity Tax Credit
Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.
The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010, and was later extended for an additional two years — 2011 and 2012 — making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
For more information about the American Opportunity Tax Credit click here.
Lifetime Learning Credit
For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.
If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.
Tuition and Fees Deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction reported on Form 8917: Tuition and Fees Deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on a Schedule A from your Form 1040. This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.
You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax. For more information, please visit the Tax Benefits for Education: Information Center from the IRS: http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.
Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.
Please review the section on Deductions in the Tax Benefits for Education: Information Center from the IRS for more information about what is a qualified student loan & qualified education expenses.http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center