Tax breaks and benefits for families with students in college |

Tax breaks and benefits for families with students in college

CMC Corner
Patty Daniells
Glenwood Springs, Colorado CO
Patty Daniells

While there are tax breaks available to college students and their families, it is not always easy to know if you qualify for those credits. Hopefully, the following information will help you, the taxpayer, understand what credits you can claim.

There are two tax education credits available to parents of students or students themselves. The American Opportunity Credit (formerly known as the Hope Credit) provides up to $2,500 per eligible student. This credit is available for the first four years of post-secondary education and cannot be claimed more than four tax years. The student must be pursuing an undergraduate degree or other recognized education credential and enrolled at least half time for at least one academic period during the year. The limit on the modified adjusted gross income is $180,000 if filing jointly or $90,000 if single, head of household. Forty percent of this credit may be refundable.

The Lifetime Learning Credit provides up to $2,000 credit per return. This credit is available for all years of post-secondary education and for courses to acquire or improve job skills; the student does not need to be pursuing a degree. The limit on the modified adjusted gross income is $124,000 if filing jointly ($62,000 if single, head of household). It is a nonrefundable credit, which means it can be applied to the amount of income tax you owe but will not constitute a refund.

You cannot take both the American Opportunity Credit and the Lifetime Learning Credit in the same year for the same student and therefore you must choose which credit will give you the better benefit.

Other types of tax benefits are deductions for tuition, fees and books. Under the tuition and fees deduction, you’re allowed to reduce your income by up to $4,000 in college expenses, depending on your income. Keep in mind that deductions are not as valuable as credits because credits can reduce your tax liability but deductions only reduce the income on which your tax amount is based.

Who can claim an education credit?

The rule of thumb to remember is if the taxpayer (parent) claims an exemption on their return for a dependent (who is an eligible student), then only the taxpayer can claim the credit based on that dependent’s expenses. Only the parent or the student can claim the credit – not both.

What expenses qualify?

Qualified expenses are tuition, fees and course materials paid for an academic period starting in 2012. This does not include expenses that were refunded, such as when the student withdraws from a class. It does include expenses paid with the proceeds from a loan. Course materials are books, supplies and equipment needed for the course of study.

What is tax-free educational assistance?

Generally speaking, any scholarship or fellowship you receive is treated as tax-free educational assistance – it is not counted as income and you will not be taxed on that money. This includes the tax-free part of scholarships and fellowships, Pell grants, employer-provided educational assistance, veterans’ educational assistance and any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Patty Daniells is a program director of High Country RSVP (Retired Senior Volunteer Program), a sponsored program of Colorado Mountain College. RSVP provides income tax preparation and electronic filing to seniors, disabled individuals and low- to moderate-income persons. For more information, call 384-8740.

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