These Tax Benefits Can Cut Your Cost Of College!

Did you know that tax benefits can cut your cost of college? As the April 15th tax deadline approaches, there’s some good news for parents and students – the federal government provides a number of tax benefits that can help defray the cost of higher education. These tax incentives come in a couple of forms:

Tax credits, which directly reduce the amount of tax you are liable for; and Tax deductions, which reduce the amount of income that you pay taxes on. You may qualify for one, or more, of these tax benefits, but there are some restrictions against them as well. Here’s a short explanation of what it takes to qualify for each of these education tax incentives:

American Opportunity Tax Credit

These Tax Benefits Can Cut Your Cost Of College!

The American Opportunity Tax Credit is a tax credit of up to $2,500 per year for all four years of undergraduate college education expenses. You can claim this tax credit for each child that attends college. In addition, the credit is partially refundable, which means that you may be able to claim the tax credit and receive a check from the IRS even if you owe no income tax!

You are eligible for the American Opportunity Tax Credit if your modified adjusted gross income is $90,000 or less (for married couples filing a joint return, $180,000 or less). The amount of the credit varies depending on your income and how much you spent on higher education expenses. Education expenses that count towards this credit are tuition, fees, course-related books, supplies, and equipment for higher education (less the amount of certain scholarships and grants received).

If you qualify for this tax credit, it’s like getting $2,500 in cash from the government to pay for college. The American Opportunity Tax Credit is definitely the best deal of all the tax incentives, but here are the others.

Lifetime Learning Credit

The Lifetime Learning Credit is a tax credit of up to $2,000 per year “per family” for undergraduate college education expenses.

Full or partial tax credit is given to families with less than $60,000 in income, or $120,000 in income if you file a joint tax return. Again, education expenses that count towards this credit are tuition, fees, course-related books, supplies, and equipment for higher education (less the amount of certain scholarships and grants received).

Tuition & Fees Deduction

The Tuition & Fees Deduction is a tax deduction of up to $4,000 per year “per family” for college tuition & fees costs. This deduction may be helpful to you if you are not eligible to take one of the tax credits. It is taken as an adjustment to income, which means that you can claim this deduction even if you do not itemize deductions on Schedule A of Form 1040.

Full or partial tax deduction is given to families with less than $80,000 in income, or $160,000 in income if you file a joint tax return. The amount of the tuition and fees deduction you are eligible for depends on the amount of qualified tuition and related expenses paid for eligible students. Qualified educational expenses include tuition, room and board, fees, and books for a student enrolled at least half-time and pursuing a degree, certificate, or similar program at an eligible institution.

Student Loan Interest Deduction

The Student Loan Interest Deduction is a tax deduction of up to $2,500 per year “per family” for the interest that you pay on your student loans. It is taken as an adjustment to income, which means that you can claim this deduction even if you do not itemize deductions on Schedule A of Form 1040.

Full or partial tax deduction is given to families with less than $75,000 in income, or $150,000 in income if you file a joint tax return. Qualified student loans must have been used to fund educational expenses such as tuition, room and board, fees, and books for a student enrolled at least half-time and pursuing a degree, certificate, or similar program at an eligible institution.

The All-Important 1098-T Statement

You will receive information about your 2011 educational expenses in the form of a 1098-T statement from the college itself. Schools are required to send this information to each student, and to the IRS, by Jan. 31, 2012. Some schools report only tuition and fees on this form. If your 1098-T does not include the amounts that you paid for course-related books, supplies, and equipment, and these expenses are allowed for the credit you are taking, then you can use your own records to figure the amounts paid for these items and report the total on your tax return. If you do this though, be sure to keep good records of these transactions.

If you have any questions about these tax incentives, or how to qualify, please contact our office as soon as possible.

The author of this newsletter is Ryan Clark.

If you have any questions about the information contained in this newsletter, or any questions about college funding in general, please contact our office.

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