A group of tax benefits are available to those who are pursuing higher education for themselves, their spouse, or their dependents.
In this section we’ll describe the similarities and differences between:
- The American Opportunity credit
- The Lifetime Learning credit
- Coverdell education savings accounts (ESAs)
- The deduction for interest on qualified student loans
In most cases, you have to choose among these benefits; since the same student is not permitted to use two different education tax breaks in the same year.
CAUTION: You cannot claim the American Opportunity Credit or the Lifetime Learning Credit on a married filing separately return
For each student, in any given year you can only take advantage of one of the following:
American Opportunity credit or Lifetime Learning credit.
For those who qualify, the American Opportunity credit will generally save you the most tax money. If you don’t qualify, the Lifetime Learning credit is generally the next-best tax break. For those who have recently graduated, the student-loan interest deduction provides a measure of relief.
The American Opportunity Credit: If you, your spouse, or a dependent for which you claim an exemption was enrolled at least half time in the first four years of college in 2013, you may benefit from the American Opportunity credit.
The credit is for the first $2,000 of qualified expenses incurred by the student, and 25 percent of the next $2,000, so that the full credit of $2,500 applies if the student has at least $4,000 in expenses.
The American Opportunity credit is available for each student in your family who meets the qualifications:
- He or she has not completed the first four years of post-secondary education before 2013
- Is enrolled in a program that leads to a degree, certificate, or other recognized academic credential
- He or she has not already claimed either the Hope or American Opportunity Credit for four years
- Is taking at least one-half of the normal full-time load of classes, for at least one academic period beginning during the calendar year
- Has not been convicted of a drug-related felony
In 2013, the expenses that count toward the credit are tuition and fees required for attendance and course-related books and materials. Generally, the expenses can be deducted in the year the class begins, if the expenses were paid during that year. However, if you prepay expenses during one year, for a course that begins in the first three months of the following year, you can count those expenses toward the credit in the year they were paid.
Eligible institutions are any accredited public, nonprofit, or for-profit post-secondary institution eligible to participate in federal student aid programs.
Lifetime Learning Credit: For students who can’t qualify for the American Opportunity credit, the Lifetime Learning credit provides a smaller tax benefit for an unlimited number of years in which one or more post-secondary educational courses are taken. The courses can apply toward an undergraduate, graduate, or professional degree, certificate program, or other academic credential. Moreover, you do not need to be pursuing any particular type of degree. You can claim the credit for yourself, your spouse if filing jointly, and any dependents for which you claim an exemption on your tax return.
This credit is worth 20 percent of the first $10,000 in higher education expenses per family. Therefore, the maximum amount of credit you can claim is $2,000. If one or more students in the family are eligible for the American Opportunity credit, other family members may use the full $2,000 of the Lifetime Learning credit. However, a single student cannot use both credits; he or she must choose between them.
The Lifetime Learning credit applies to tuition, fees and course materials (as with the American Opportunity credit), and the same income phaseout methods apply, but at lower income levels. The phaseout of the Lifetime Learning credit occurs in the income range from $50,000 to $60,000 for singles and from $100,000 to $120,000 for married couples filing jointly.
To claim the credit, you must use Form 8863, Education Credits, and attach it to your tax return. Don’t forget that if the education was job- or business-related, you might be able to deduct it as a business expense instead of claiming the credit.
Education Savings Accounts: Another tax break to help pay for education (including elementary and secondary education) is the Coverdell education savings account (ESA). The account works similarly to a Roth IRA in that contributions are not deductible, but interest and dividends that build up within the account are tax-free, and amounts withdrawn from the account under proper circumstances will not be taxed.
An ESA is set up on a per-child basis with a bank or other financial institution approved by the IRS. Each child must have one or more separate accounts, and the child, a parent, grandparent or friend whose modified adjusted gross income is under certain limits may contribute up to $2,000 to the account per year. More than one person can contribute on behalf of the same child, but the total contributions for that child cannot exceed $2,000. No contributions can be made after the child turns 18, and no contributions can be made in the same year that a contribution is made to a qualified state tuition program on behalf of the child.
· There are income restrictions on the persons who are able to contribute to education IRAs.
· Distributions from ESAs are not taxed if spent on qualified expenses; accounts can be rolled over to family members; if not spent or rolled over, the accounts must be distributed within 30 days after the beneficiary reaches age 30.
Student Loan Interest Deduction: If you paid interest on a student loan in 2013, you may be eligible to deduct up to $2,500 of the interest you paid, whether the loan was for your own education, your spouse’s, or that of a child or anyone else who was your dependent at the time the education was undertaken.
For 2013, the deduction is phased out for those with modified adjusted gross income between $60,000 and $75,000 if you are single, or between $120,000 and $150,000 if filing a joint return (these rates may be adjusted annually for inflation in future years). You can’t claim this deduction at all if you are married filing separately, or if you can be claimed as a dependent on someone else’s return.
For purposes of this deduction, “modified adjusted gross income” is computed by taking the AGI amount from Line 37 of Form 1040, and adding back any foreign earned income exclusion, foreign housing exclusion or deduction, and the exclusion of income for residents of American possessions.
To figure the limit, take the portion of your modified AGI that exceeds $60,000 (or $120,000 if you are married filing jointly) and divide it by $15,000 ($30,000 if filing jointly). The resulting fraction should be multiplied by your interest deduction to determine the amount that you will lose due to your high level of income.
Claiming the deduction. You don’t need to fill out any special forms to claim the student loan interest deduction, and you don’t need to itemize your deductions to take advantage of it. The deductible amount is simply written on Line 33 of Form 1040, or Line 18 of Form 1040A, and subtracted from your income.
CAUTION! Be careful. Not all student loans qualify for the deduction.
For further information on this tax break and other available tax breaks, please contact our office.
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