A college diploma has almost become a prerequisite for a successful career in this day and age, so understanding the tax breaks that are associated with college tuition costs is essential. While many of the traditional tax breaks remain in place, some new changes have been implemented that assist taxpayers in paying for a higher education. Tax credits were expanded for students and parents by way of the American Recovery and Reinvestment Act of 2009, a few highlights of this act were modifying the Hope Tax Credit with the American Opportunity Credit, increasing income limits to qualify for tax credits, and expanding the scope of qualified expenses to include required course materials. The American Opportunity Credit is made available to a broader range of taxpayers than the existing educational credits. The maximum credit is 2,500 per student, and 40% of that credit is now refundable for students and parents with little or no taxable income. The credit is offered for those who are completing their first four years of college, the Lifetime Learning and Hope Tax Credits are still available for graduate students, but are not refundable, and only help those with tax liability during the year. A student with qualified expenses over 4,000 dollars will be able to receive the full credit, and for those with fees that are below that level will be credited 100% percent for the first 2,000 dollars of expenses, and 25% for the next 2,000 dollars in expenses. Qualified expenses have also been modified to now include not only tuition and course fees, but textbooks and other required materials for each class. Parents who claim a student as their dependent, and have a modified gross income below 160,000 dollars a year, (80,000 if filing single, head of household) will be eligible for the full credit; incomes above that amount will begin to be phased out. The existing Hope and Lifetime learning credits have higher income ceilings, allowing those with higher incomes to still receive benefits. Student loan interest is still deductible for those with modified adjusted gross incomes below 75,000 dollars (150,000 filing jointly). The student loan interest deduction is an above the line deduction, which means you do not have to itemize to be able to take it. Parents can take the deduction if your dependent incurred the loans and the maximum amount of deductible interest per year is 2,500. Another tax break that is still available is the qualified tuition and fees deduction for college expenses paid during the year for your dependents or yourself. This deduction is also above the line, just like student loan interest and can be taken without itemizing. The maximum benefit allowable is 4,000 dollars a year, to find out your tax benefit, multiply the total deduction by your marginal tax rate. Similar income ceilings are in place for this deduction as well, if your modified AGI is above 80,000 a year, (160,000 if filing jointly) then you will not be eligible. The best place to start when figuring out how to pay for school is by filling out your FAFSA, this will determine you what types of grants and cheap loans that you will qualify for, for example Pell grants and Stafford loans. The best time to do this is when you file your taxes in the spring, because you will need your tax return to complete the FAFSA. |
| Tax Credits and Tips for College Students and Their Parents |