Education Tax Breaks 101
You don’t need a statistics degree from M.I.T. to realize that college is expensive. According to the National Center for Education Statistics, the average annual cost of tuition and room and board at a four-year institution is $12,804 at public schools and $32,184 at private schools. And these expenses are growing fast: between 2000 and 2010 college expenses, after being adjusted for inflation, increased 37% at public schools and 25% at private schools.
Fortunately, the federal government provides several types of tax incentives to make college and other postsecondary education more affordable for students and their parents. The education incentives can be divided into two groups: credits and deductions. Credits directly reduce your overall tax bill by the amount of the credit. Deductions, on the other hand, indirectly reduce your final tax bill by lowering your taxable income.
Both types of education tax incentives can go a long way in lowering the net cost of higher education. It is up to you and your tax preparer to determine which incentives you qualify for and which ones are most advantageous to you.
Education Tax Credits
There are two federal income tax credits for postsecondary education, the American Opportunity Credit (which has replaced the Hope Credit) and the Lifetime Learning Credit. This is an either or proposition; you may only claim one of the credits per student per year.
American Opportunity CreditLifetime Learning Credit
Amount$2,500 per student$2,000 per student
Type of schoolingUndergraduate courses or other recognized credential programs (but not graduate school)Undergraduate, graduate, or other courses to improve job skills (student doesn’t have to be pursing a degree or credential)
DurationFirst four years only of postsecondary educationAll years of postsecondary education
RefundableUp to $1,000No
Covered expensesTuition, fees, and course-related books, supplies, and equipmentTuition, fees, and course-related books, supplies, and equipment
Income restrictionsPhase-out begins at $80,000 for single taxpayers; $160,000 if married filing jointlyPhase-out begins at $60,000 for single taxpayers; $120,000 if married filing jointly
Other considerationsStudent must be enrolled at least half-time for at least one academic period
Notice that the American Opportunity Credit is larger, $2,500 compared with $2,000 for the Lifetime Learning Credit. But the Lifetime Learning Credit is less restrictive; it applies to any postsecondary education, whereas the American Opportunity Credit applies to just the first your years of college.
Although you can claim only one of the credits per student per year, you can switch credits from year to year. For example, you could claim the American Opportunity Credit for the student’s freshman year and Lifetime Learning Credit for the sophomore year. Also, the credit may be claimed by the parent or the student, but not both.
Education Tax Deduction
There is also a federal tax deduction of up to $4,000 for qualified postsecondary education expenses. The deduction begins phasing out at income levels of $65,000 ($130,000 if married filing jointly) and is completely eliminated for those who earn more than $80,000 ($160,000 if married filing jointly).
The only expenses that qualify for the deduction are tuition and other expenses required for enrollment at a college, graduate school, or other postsecondary educational institution. Books, room and board, student health fees, and other school-related costs generally do not count as qualifying expenses for the deduction.
Again, taxpayers cannot claim the education deduction if they also claim one of the education credits described above. The deduction is temporary, and 2011 is scheduled to be the last year that taxpayers can capitalize on it.
K – 12 Education Credit for Illinois Residents
Illinois taxpayers may also qualify for a state income tax credit of up to $500 for qualified education expenses for children or dependents in kindergarten through 12th grade. The credit equals 25% of expenses in excess of $250 for tuition, books, and lab fees. The student(s) must be younger than 21 at the end of the school year and may attend either public or private school in Illinois.
Figuring out which tax incentives you qualify for and then calculating which one is the most valuable can be a bit complicated. Here at Eilts & Associates, we are happy to guide you through these decisions and help you maximize the value of the education tax breaks. If you have any questions, please contact us at 773.525.6171 or bart@eiltscpa.com.
