You can still get tax benefits for higher education expenses.
If you or your family members attend or are planning to attend postsecondary school in 2013, you can count on education tax credits to help you defray the cost.
American Opportunity Credit (formerly the Hope Credit)
One tax benefit is not only extended, it’s also been improved. The Hope Credit was temporarily replaced by the American Opportunity Tax Credit in 2009. It was set to expire in 2012, but it’s now been extended through 2017.
The American Opportunity Credit provides a higher credit for more years of education than taxpayers received from the Hope Credit.
The American Opportunity credit basically pays for up to the first $2,000 you spend on tuition, fees, books, supplies, and equipment by giving you a credit for up to 100% of that amount.
If you qualify, it also gives you 25% of the next $2,000 back as a credit, for a total credit of up to $2,500.
Unlike the old Hope Credit, the American Opportunity Credit is good for all four years of undergraduate studies.
Remember, this credit is not 100% refundable
A nonrefundable credit cannot reduce your tax for the year to less than zero. However, because this credit is partially refundable, you may be able to receive up to $1,000 of the credit (40% of the limit) as a refund, even if you do not owe income tax.
The student (you, your spouse, or your dependent) must be enrolled at least half-time in a program leading to a degree for you to take this credit.
The credit phases out at higher income levels.
Lifetime Learning Credit
The Lifetime Learning Credit provides a tax credit equal to 20% of your tuition and certain related expenses up to $10,000. The credit maximum is $2,000.
This credit also phases out at higher income levels.
Higher education expenses deduction
The tuition and fees deduction has been extended through 2013. This may let you reduce your taxable income by as much as $4,000. It’s taken as an adjustment to income, which means you can take this deduction even if you don’t itemize your deductions.
You can’t take this deduction if you are married filing separately, or if your parent or other person can claim you as a dependent on their return. The deduction phases out at higher incomes.
Student loan interest deduction
If you pay interest on student loans, you may be able to deduct the interest, whether or not you itemized deductions. You deduct it as an adjustment to income, not an itemized deduction. By reducing your adjusted gross income, the student loan interest deduction may help you qualify for other tax benefits as well.
The American Taxpayer Relief Act of 2012 permanently repealed the former five-year limit for deducting student loan interest. This means you can deduct student loan interest for as long as it takes you to pay it off.
You can deduct up to $2,500 in student loan interest. If you have a modified adjusted gross income of $60,000 or higher ($125,000 if filing jointly), the amount you can deduct begins to be phased out. You cannot take this deduction if you are married and filing separately.
Which tax benefit should I use first?
Credits are almost always a better deal than deductions. Try the American Opportunity Credit first. If you don’t qualify for it, the Lifetime Learning Credit is the next best thing.
If you can’t take a credit, the next choice is the higher education expenses deduction.
Do I get a tax benefit for education expenses I pay for my kids?
You can generally take the credits or deduction for eligible expenses for yourself, your spouse, or a dependent you claim on your tax return.
For student loan interest, you can deduct interest for a loan you took out for eligible education expenses for your spouse, or a person who was your dependent when you took out the loan.
Can I take the American Opportunity Credit and the Lifetime Learning Credit in the same year?
You can take both credits in the same year – but not for the same student. For example, if you had education expenses, you could take either one credit or the other, but not both.
If you and your spouse both had education expenses, however, one of you could take the American Opportunity Credit. Your spouse can still take the Lifetime Learning Credit if he or she qualifies.