If you or your children are attending college this fall, consider talking to your tax adviser about any federal income tax credits you may be eligible for. The American Taxpayer Relief Act of 2012 extended the American Opportunity Tax Credit through 2017, and retroactively extended the tuition and fees deduction through the end of this year. The act also permanently suspends the 60-month rule for the $2,500 above the line student loan interest deduction.
The American Opportunity Tax Credit equals 100% of the first $2,000 in expenses, plus 25% of the next $2,000, for a maximum credit of $2,500 per student per year. The American Opportunity Tax Credit also remains 40% refundable. Therefore, a taxpayer who has at least $4,000 in qualified expenses should qualify for the maximum credit of $2,500. If the taxpayer has no tax liability to offset that credit, he should qualify for a $1,000 refund from the government. The credit is gradually reduced for single taxpayers when their adjusted gross income (AGI) reaches $80,000. The credit is completely phased out for single individuals with modified AGI of $90,000. For taxpayers who are married filing jointly, the credit begins to phase out when their AGI reaches $160,000, and is completely phased out for couples with modified AGI of $180,000. This credit targets students who are in the first four years of postsecondary education and who are enrolled at least half-time.
The tuition and fees deduction may be beneficial to you in certain circumstances, or if you do not qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit. Additionally, you can claim this deduction even if you do not itemize deductions. Through 2013, you may be able to claim up to a $4,000 deduction if you pay for qualified higher education expenses for an eligible student. This includes you, your spouse or your dependents. The deduction is allowable as an adjustment to income if your modified adjusted gross income is less than $65,000 if single, or $130,000 when filing a joint return. If your income is above these limits, the deduction begins to phase out and is completely phased out when your modified AGI reaches $80,000 for single and $160,000 for married filing jointly (MFJ). As with the education credits, the tuition and fees deduction can be used for expenses paid with a student loan.
The Lifetime Learning Credit allows taxpayers to claim a credit on their tax return for the qualified tuition paid for themselves, their spouse or one of their dependents to attend a postsecondary school. The student must be pursuing a college degree, graduate degree or vocational training. The Lifetime Learning Credit offers an allowable credit of up to $2,000 per tax return per year for an unlimited number of years. Specifically, this credit allows for a 20% credit of the first $10,000 of qualified educational expenses paid for all eligible students per year.
If you are borrowing federal student loans to pay college, you may be able to deduct student loan interest paid on loans issued for yourself, for your spouse (provided you file jointly), and for your dependents. The maximum deduction is limited to $2,500; however, there are income limitations. If your income is under $60,000 for single (or $125,000 MFJ), you may be able to deduct up to $2,500 in student loan interest. If your income is between $60,000 and $75,000 for single ($125,000 and $155,000 for MFJ), your deduction for student loan interest is limited. If your income is more than $75,000 ($155,000 MFJ), then you are ineligible for a student loan interest deduction.
Tax deductions and credits can be tricky, as not all of them can be used together. If you believe you can benefit from any of these, discuss your situation with your C.P.A. to determine the best use of your available credits.
At Henssler Financial we believe you should Live Ready, which includes understanding the tax breaks the IRS provides for higher education. If you have questions regarding these available tax credits and deductions, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
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