Tax Benefits for Education and Training

August 16th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

Classes have already resumed for almost all students throughout the nation.    All education is an investment for our future, and this “investment” will usually always provide an exceptional “rate of return” throughout your entire life.     

If you have incurred expenses for either your education, or someone else, the costs may qualify for either a tax deduction or tax credit.   However, the requirements change almost every year.  Always review the most current requirements to ensure that both you and your expenses qualify.  Additional tips include:

  •   Keep and maintain accurate supporting records – these include (but are not limited to) credit card statements, cancelled checks, bank statements, student loan lender reports, etc;
  •  Change of address updates – be sure to always update your current address, especially with lenders.  The lender will use the latest address on file at the end of the year to file the required reports with the IRS, and to provide you with a copy for your tax returns;
  •  Review the requirements from the current tax authority publication to determine which provisions provide the greatest tax benefit to you.  For example, the American Opportunity Credit has been extended for two additional years.  This tax credit has a maximum of $2,500.00/year for calendar years 2011 and 2012.  It is important to note that this tax credit is $500.00 more than the Lifetime Learning Credit annual limit of $2,000.00.  It is also 40% refundable which means that you may receive a tax refund even if you do not owe any income taxes.  There are income limits based on your “modified adjusted income” (as defined here http://www.irs.gov/businesses/small/article/0,,id=146823,00.html  ) 
  •  Review IRS publication 970,  “Tax Benefits for Education”,  in either Acrobat Reader format (http://www.irs.gov/pub/irs-pdf/p970.pdf) or HTML format (http://www.irs.gov/publications/p970/index.html);
  •  Other topics which are contained in this publication include:  “Scholarships, Fellowships, Grants, and Tuition Reductions”, “Student Loan Cancellations and Repayment Assistance”, “Coverdell Education Savings Accounts”, “Qualified Tuition Programs”, “Education Exception to Additional Tax on Early IRA Distributions”, “Education Savings Bond Program”, “Employer-Provided Educational Assistance”, and “Business Deductions for Work-Related Education”. 

 

Back-to-School Tips for Students and Parents Paying College Expenses 

Whether you’re a recent graduate going to college for the first time or a returning student, it will soon be time to get to campus – and payment deadlines for tuition and other fees are not far behind. The Internal Revenue Service reminds students or parents paying such expenses to keep receipts and to be aware of some tax benefits that can help offset college costs.Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.

  1. American Opportunity Credit This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).
  2. Lifetime Learning Credit In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).
  3. Tuition and Fees Deduction  This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
  4. Student loan interest deduction  Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information, visit the Tax Benefits for Education Information Center at www.irs.gov or check out Publication 970, Tax Benefits for Education, which can be downloaded at www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).

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Posted by Bill Seabrooke