Tax season is now upon us, and, as both a tax preparer and a tax consultant for a well-known tax software company, I have been involved in a good number of interesting tax scenarios that are often misunderstood by taxpayers.
Educational expenses, including the American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction can be a little confusing. Remember that credits are offsets again the amount of tax that you owe, while a deduction simply reduces your taxable income.
The American Opportunity Credit is a tax credit of up to $2,500 of the cost of tuition, fees and course materials that were paid or billed in 2012. If a taxpayer qualifies for this credit but owes no income tax, 40 percent of the credit – $1,000 – is refundable, which means the $1,000 will be distributed to that person anyway. The credit may be claimed by parents of dependents or by the student themselves, so long as their parents do not claim them as a dependent. This credit may be claimed by a taxpayer whose AGI (increased by any foreign income that was not counted on the 1040 form) is less than $80,000 or $160,000 for married filing jointly.
Eligible students must be enrolled in a program leading to a degree, certificate or other post-secondary school credential. The student must be in the first four years of post-secondary education, is at least a part-time student and not have been convicted of a felony drug offense.
The Lifetime Learning Credit is available even if the student is beyond the first four years of post-secondary education, and a student need not be in school at least half of the time.
Vocational schools such as Aiken Technical College are eligible institutions for both credits. If a student only took one course, that would be enough to qualify. Qualifying expenses for this credit include only tuition and other fees that are required for enrollment. Books, room and board and others are not allowable.
If your adjusted gross income is below the threshold, there is no reduction. If your income is in the middle of the range, you credit would be half of the max credit, and if your income is greater than the threshold, you would qualify for 0 credit. For 2012, the income range for singles, head of households or qualifying widow is between $52,000 and $62,000. For Married Filing Jointly, the range is $107,000 to $127,000.
With all tax credits and deductions, you must reduce your qualifying expenses by any financial aid that the student received.
The Tuition and Fees Deduction provides up to a $4,000 deduction for tuition expenses and other expenses that are required as a condition of enrollment. The deduction itself is equal to 40 percent of the tuition and fees expense, up to a maximum of $4,000 in a given year.
Married couples must file jointly to claim this deduction. The phase out ranges for singles are between $65,000 to $80,000 and $130,000 it $160,000 for married couples filing jointly. Finally, you may not claim this deduction if you qualified for one of the credits mentioned heretofore.
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Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.