Higher education expenses are high and they are only on the rise. To help offset these rising costs, the Internal Revenue Service provides for several tax benefits.
The American Opportunity Credit modifies the Hope Credit, allowing more taxpayers to qualify. The full credit is available for those individuals whose gross income is $80,000 or less ($160,000 or less for married couples filing jointly). While the Hope Credit may still be taken on your 2008 return, the American Opportunity Credit replaces the Hope Credit on your 2009 and 2010 returns. The American Opportunity Credit is available for four post-secondary education years instead of the two years allowed by the Hope Credit. This credit is a nonrefundable credit up to $2,500 per student; therefore, if the credit is for more than your tax liability, the amount over your tax liability will not be refunded.
The Lifetime Learning Credit is a maximum $2,000 credit for qualified education expenses. Unlike the American Opportunity and the Hope Credit, there is no limit on the amount of years a taxpayer can take the Lifetime Learning Credit. In general terms, the Lifetime Learning Credit is available to those who pay qualified education expenses for higher education for an eligible student. This eligible student must be yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. This credit is phased out for higher income earners.
Taxpayers may also take a tuition and fees deduction up to $4,000. This deduction reduces the amount of your taxable income. Unlike other itemized deductions, this deduction is available even if you do not itemize on Schedule A. Typically, this deduction is beneficial to those taxpayers who are unable to take the lifetime learning credit.
Taxpayers must remember that taking certain credits and/or deductions precludes you from taking other credits and/or deductions. For example, you may not take both the Lifetime Learning Credit and the American Opportunity Credit for the same student.
To learn more about these credits and deductions, or to find out about other tax benefits (i.e., student loan interest deductions, business deductions for work-related education, 529 Plans, Coverdell Education Savings Accounts, and taxable vs. non-taxable scholarships) call the attorneys at Kohler & Smith Co., LPA today or visit their website at www.kohlersmith.com.