With the school year winding down, a lot of students will be headed towards college in the fall. Here are a few credits and deductions to keep in mind. This is article number seven in our series of Tax Credits. Click here to read the previous articles.
Higher Education Tax Credits
Education credits offset the cost of higher learning for taxpayers, their spouses and dependents. The following credits are claimed on Form 8863.
- American opportunity credit applies to the first four years of undergraduate study and is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 or $2,500 maximum credit. Qualified expenses include tuition, fees, and course-related books, supplies, and equipment, which do not have to be purchased directly from the school. It has been extended through December 31, 2012. It begins to phase out on single taxpayers with modified adjusted gross income of $80,000 ($160,000 married filing joint) and completely phases out at $90,000 for single taxpayers ($180,000 married filing joint.) This credit is 40% refundable.
- Lifetime learning credit is available for all years of postsecondary education and for courses to acquire or improve job skills. The credit can be up to $2,000 per eligible student, but is not refundable. Qualified expenses include tuition and fees. Course related books, supplies and equipment can be included only if the fees and expenses must be paid to the education facility as a condition of enrollment or attendance. For 2012, the modified adjusted gross income range over which the credit is phased out is $52,000 to $62,000 for single taxpayers and $104,000 to $124,000 for married filing joint.
Example: Bill and Janet paid $10,000 in qualified expenses for their son, a junior at the local university. They have adjusted gross income of $150,000, with an income tax liability of $20,000. They are eligible for the full American opportunity credit in the amount of $2,500.
Qualified Tuition Savings Programs for Missouri Deduction
Another savings opportunity is the state sponsored 529 plans. These plans are designed to help individuals and families save for college expenses through a tax advantaged investment plan. Money contributed to the Missouri plan is deductible from state taxable income in the amount of $8,000 per year for single and $16,000 for joint filers.
No federal deduction is allowed for this contribution, but the earnings from the investment are tax free for federal and state as long as the amount is used for qualified expenses. Qualified expenses include tuition, fees, supplies and equipment required for the enrollment or attendance of a beneficiary at an eligible education institution.
Certain room and board costs may qualify if incurred while attending the institution at least half-time. In determining whether or not the earnings are taxable, the qualified expenses must be reduced by scholarships received and expenses taken in figuring other educational credits, such as the American opportunity or lifetime learning credit.
Student Loan Interest Deduction
Student loan interest is generally treated as personal interest and thus isn’t deductible. However, individuals may deduct a maximum of $2,500 annually for interest paid on qualified higher education loans. This is claimed as an adjustment to gross income to arrive at adjusted gross income. You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest).
For 2012, the deduction phases out ratably for taxpayers with modified AGI between $60,000 and $75,000 for single and $125,000 and $155,000 for joint returns. A person who is claimed as a dependent on another’s return can’t claim the education interest deduction. The deduction may be claimed only by a person legally obligated to make the interest payments.
For additional information on any of the above credits or plans, please contact us today.
Written by Shelly Toft, CPA