The cost of education keeps going upfasterthantherateofinflation, but Congress has created tax breaks to help with education expenses. American Opportunity Tax Credit (AOTC). This can be worth up to $2,500 per student. The amount of the AOTC credit is 100% of the first $2,000 of education costs plus 25% of the next $2,000. Limitations… The credit is available only for the first four years of postsecondary education perstudent. The student must be pursuing a degreeorotherrecognizededucation credential and be enrolled at least half-time. The credit is phased out as your modified adjusted gross income (MAGI) rises from $80,000 to $90,000 on a single return, and from $160,000 to $180,000 on a joint return. Up to 40% of the credit isrefundable. It can generate a refund greater than the amount of payments you made. Lifetime Learning Credit. This can be as much as $2,000 per tax return. The credit equals 20% of the first $10,000 of education expenses(maximum credit per taxpayer regardless of the number ofstudents). The credit may be claimed for a student for any number of years. The student need not be pursuing a degree and may be taking only one course. The creditis phased out as your MAGI rises from $55,000 to $65,000 on a single return, and from $110,000 to $130,000 on a joint return. Credit planning: TheAOTCcredit andLifetime Leaning credit can’t both be claimed for the same student in the same year, but both can be claimed on the same return for different students (such as a child in college and a parent taking a work-related course). Student-loan interest deduction. This is available for up to $2,500 of loan interest even for those who don’t itemize deductions on their tax returns. Loan origination fees are deductible, too. Snag: Those who don’t itemize often overlook this deduction. The deduction is available forinterest on a loan used to finance tuition, fees, room and board, books, equipment, and other necessary expenses (such as transportation) at virtually all accredited postsecondary and vocationalschools. Limit: The deduction is phased out as MAGI increase from $65,000 to $80,000 on a single return and from $130,000 to $160,000 on a joint return. Coverdell Education Savings Accounts (ESAs). Can receive up to $2,000 per year for any single beneficiary under age 18. ESAs earn tax-deferred investment returns which can be used tax free to pay education expenses. Advantage: ESAs can be used to pay for elementary through high school, not just college. To contribute to an ESA, one must have MAGI not exceeding $110,000 on single returns or $220,000 for married filing jointly. Anyone can contribute to an ESAfor an individual, so if parents are unable to, a friend or other relative may contribute. Qualified tuition programs (Section 529 plans). These plans can hold funds that earn tax-deferred investment returns which can be spent tax free on college education costs. Or they can be prepaid tuition plans allowing a person to buy tuition now at today’s prices. Advantage: These plans can hold far more than ESAs and therefore can be used for estate planning. Yet a person who contributes funds to the plan can withdraw them in case of need – a unique instance of being able to “keep while giving away” under the Tax Code. Tax-free scholarships, fellowships, and need-based grants. These forms of aid generally are tax free when fundsreceived are applied to tuition, fees and required courserelated expenses (such as books, supplies, and equipment). Beware: Funds applied to the cost of room and board, travel, or research are taxable.
