Paying for college is costly. But there are some tax benefits that can help parents who are footing the bill, or students who are independent. The time to understand those special deals is now -- before you file your 2013 tax return. According to H & R Block, these complex credits and deductions are often overlooked, or misused, costing taxpayers money.
While you may qualify for several of these benefits, you can only claim one on your return. So you'll have to do some figuring to decide which offers the best deal. If you go online to the IRS website, you can read Publication 970, Tax Benefits for Education to find details and charts of the eligibility rules. Here is a summary of the most significant deals.
For each of the tax benefits discussed below, tuition must be paid to an accredited higher educational institution, which may be a college, university, or commercial certificate program.
American Opportunity Credit (AOC)
This credit can be claimed on the first $4,000 of qualified education expenses. It is 100 percent of the first $2,000 and 25 percent of the next $2,000, with a maximum credit of $2,500. The credit is up to 40 percent ($1,000) refundable. It can be claimed for each eligible student, assuming there is more than one in a family.
This is a particularly attractive benefit because a credit is a dollar for dollar reduction of the taxes you owe. And up to $1,000 of this particular tax credit can be refunded -- paid out -- to the taxpayer if no taxes are owed! With a maximum credit of $2,500, this should be the starting place if the student qualifies.
But there are some significant restrictions. The student must not have completed the first four years of post-secondary education as of the beginning of the taxable year. Also, this credit can only be claimed four times -- generally once for each undergrad year. The student must be enrolled in a degree or certificate program, be enrolled at least half time, and have no felony drug conviction.
There is an income restriction for claiming the American Opportunity Credit. The benefit starts phasing out if a single filer has income over $80,000, and disappears completely at income over $90,000. For joint returns, the income limit for the full credit is $160,000, ending at $180,000.
Either a parent or child can claim the credit on their return, however if the parents claim the child as a dependent, then the credit must be claimed on their return.
Eligible expenses include tuition, fees, and any required course materials, such as textbooks or lab fees. Computers are qualified as expenses only when required as a condition of enrollment. But room, board, and other personal expenses are <
Lifetime Learning Credit
This credit is available for 20 percent of qualified expenses up to $10,000 with a maximum credit of $2,000. This can only be claimed once per return, no matter how many students are listed as dependents. And it cannot be claimed on the same return as the AOC, described above, although you could claim the lifetime learning credit for one student and the AOC for another student on the same return.
The maximum Lifetime Learning credit is smaller than the AOC at $2,000 per year. But there is no requirement that the student be working toward a degree. Like the AOC, it can be claimed by either parent or child -- but the child may not take the credit on his or her return if claimed as a dependent by a parent.
The income limits for this credit are lower than the AOC -- $53,000 to $63,000 on a single return; $107,000 to $127,000 on a joint return. And similar educational expenses qualify for the credit as those listed above for the AOC, however only payments made directly to the institution are qualified.
Tuition and fees deduction
This is the last year for claiming up to $4,000 in deductions for tuition and fees. This benefit expired at the end of 2013, and has not been extended. A deduction is less valuable than a tax credit, which is why this is listed third.
As with the two credits, there is an income limit of $65,000 (phasing out at $80,000) on a single return, and $130,000 (phasing out at $160,000) on a joint return. But there are complex rules pertaining to who may claim the deduction. If a parent taxpayer has paid the expenses and claimed the exemption for the student as a dependent, then the parent can take the credit. But if the dependent paid the expenses, then no one can claim the deduction! And if the taxpayer pays the expenses and does not claim the eligible student as a dependent, but could have done so, then no deduction is allowed. This is a murky area where the services of a tax provider or good tax software are essential.
H&R Block has one more word of warning. If you received Form 1098-T from your school, detailing educational expenses paid, it likely will not reflect the total "qualified" expenses, because it will include scholarships paid to the educational institution. In fact, some portion of the scholarship money may be considered taxable scholarship income on Form 1040, Line 7. Or this income might be required to be reported on the parent's return under the Kiddie Tax provisions.
Deciding whether to claim a child as a dependent, or let the child file as an independent is far more complex than just the tax provisions. Emancipation may impact eligibility for other financial aid programs or even residency requirements. So there's a lot more to these decisions than just filling in a few lines on a tax form.
Lindsey Buchholz is a principal tax research analyst at H&R Block's Tax Institute, who provided much of this analysis. She points out that all of these tax decisions have far reaching impact. If you want answers online to questions about college tax deductions (and almost every other topic), go to the H&R Block Tax Institute website Q&A service at www.hrblock.com/get-answers.
It seems you'll need that college education to make the right decisions about educational tax benefits. And that's The Savage Truth.