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Key Education Tax Benefits to Cut College Costs


Other than buying a home, a college education is one of the biggest investments Americans typically make.

Illustration of a student crushed by college debt

College costs are continually on the rise making student loan debt at an all-time high of $870 billion. The average student is more than $27,000 in debt.

Fortunately, you may be able to cut your college costs at income tax time with a variety of credits, deductions, and savings plans.

Biggest tax reward from education credits

The American Opportunity and Lifetime Learning Credits are likely to result in the biggest tax rewards on your tax year 2012 federal return due April 15, 2013.

The following basic requirements apply to both the American Opportunity and Lifetime Learning credits:

  • Filing status on the return cannot be “married filing separately.”
  • The student must be you, your spouse, or a dependent for whom you claim an exemption.
  • A dependent cannot claim the credits if claimed on another person’s (e.g. parents’) return.
  • If you do not claim the dependent exemption (even if entitled to the exemption), you cannot claim a credit based on that dependent’s expenses.
  • Claim credits on Form 8863 and file with your Federal 1040.

In addition, both credits cannot be claimed for the same student.

If multiple students are claimed on a return, the taxpayer should choose the credit that yields the biggest benefit for each student.

American Opportunity Credit

The American Opportunity Credit is a modified version of the Hope Credit.

It’s worth up to $2,500 for tuition, fees, and course materials per student for the first four years of postsecondary education.

Even if you don’t owe any tax, you can get up to 40 percent (up to $1,000) as a refund. It phases out at higher incomes.

Lifetime Learning Credit

The Lifetime Learning Credit is worth 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.

Like the American Opportunity Credit, it phases out at higher incomes.

Other college and higher education tax breaks

Several other college and higher education tax breaks can also be claimed on this year’s federal tax returns.

Up to $2,500 in student loan interest paid each year for qualified higher education expenses can be deducted, even if you don’t itemize.

The deduction phases out at higher incomes and is reduced by non-taxable distributions from a Coverdell Education Savings Account, savings bond interest used for education expenses and scholarships, or veteran’s education benefits.

Married taxpayers filing separately and people claimed as a dependent on another return don’t qualify.

Additional exceptions may apply to the aforementioned tax breaks, and other educational tax benefits exist for Qualified Tuition Programs, student loan cancellations and repayment assistance, Coverdell Education Savings Accounts, education savings bonds, employer-provided educational assistance, and work-related education.

Also available is this infographic that highlights key points of each of the 11 education tax benefits.

Photo credit: Nastassia Davis [www.nastassiadavis.com] via photopin cc

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