Whether you’re a college student, the parent of a student, or even an elementary or high school teacher, you’re probably looking for ways to reduce the costs of education on your 2010 tax return. Here’s a brief overview of the available education credits and deductions.
College Tuition Credits
For 2010 through 2012, the American Opportunity Tax Credit replaces the Hope Credit. This new credit provides up to $2,500 per student per year for four years of college, and also covers the cost of books. The American Opportunity Tax Credit begins to phase out at $80,000 of the Adjusted Gross Income for single filers; however, if the credit exceeds your income tax liability, 40% of it is refundable (that is, up to $1,000). The full credit is also allowed against the Alternative Minimum Tax.
There’s also the Lifetime Learning Credit for higher education expenses. Students are credited 20% of their annual tuition and other related fees, up to a maximum of $2,000 per student per return. This credit can be credited for an unlimited number of years (good news for super-seniors and part-time community college students). The Lifetime Learning Credit can also be used for higher education expenses that don’t qualify for the American Opportunity Credit— for example, you don’t have to be a full or even half time student.
College Tuition and Fees Deductions
For qualified higher education costs, students may be able to deduct up to $4,000. Students cannot claim this deduction if their filing status is married filing separately, or if another person can claim an exemption for them as a dependent on his or her tax return. This deduction is beneficial to those who can’t claim the lifetime learning credit because their income is too high; on the other hand, if you qualify for one of the credits and it would lower your taxes, skip the tuition and fees deduction.
If you’re using qualified student loans to pay for your higher education costs, you can deduct up to $2,500 of the interest. Speaking of interest, some or all of the interest received from eligible bonds issued after 1989 may be excludable, as long as your qualified higher education expenses for 2010 are at least as much as the proceeds of the redeemed bonds. One catch: you can’t take the exclusion if your modified Adjusted gross Income (AGI) exceeds $85,100 if you’re filing singly or $135,000 if you’re married filing jointly.
Using the 529 Plan to pay for College
Higher education students lucky enough to have 529 plans can withdraw money to pay for qualified college and post-secondary education expenses. 529 savings plans allow funds to be withdrawn tax-free to pay for things like tuition, course fees, books, computer technology and equipment and internet access. Keep in mind that only education-related equipment and software can be bought tax-free using 529 money.
Tax Deductions for Educators
Congress extended last year’s $250 tax deduction for teachers who buy classroom supplies out of their own pockets. This deduction covers a teacher’s expenses for books, supplies and equipment, computer equipment (including software and service), and supplementary materials used by the educator in the classroom to enhance learning.
This is an overview of the education-based tax law changes for the 2011 filing season. We’ll be covering more specific areas of tax law changes in future posts, so stay tuned. For more info, check out Rocket Lawyer’s Free Legal Help Personal Tax Articles.