Back to School = Big Rewards

Higher education expenses can be a huge benefit come tax time. There are several options available.

American Opportunity Credit tax years 2009 through 2010

• The maximum credit is $2,500 (same as 2009) per student (100% of the first $2,000 of expenses, 25% of the next $2,000 of expenses)
• The credit can be claimed for first four years of post-secondary education.
• Credit can reduce your tax liability dollar for dollar (Form 1040 line 49) and provide up to $1,000 additional refund (Form 1040 line 66).
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified tuition/related expenses expanded to include books, supplies and equipment needed for course of study whether or not purchased from the education institution as a condition of enrollment.
• Include Form 8863 with your tax return.
  
• The credit is available for married taxpayers filing together whose modified AGI is less than $180,000 (same as 2009), with the phase-out beginning at $160,000 (same).
• For single and head of household filers, the credit is available if modified AGI is less than $90,000 (same), with the phase-out beginning at $80,000 (same).

Lifetime Learning Credit

• The credit can be up to $2,000 per tax return (20% of qualified expenses paid, up to a maximum of $10,000).
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The amount of the lifetime learning credit is phased out at a modified AGI between $50,000 and $60,000, for MFJ $100,000 and $120,000.
• Include Form 8863 with your tax return.

Tuition and Fees

• The income subject to tax can be reduced by up to $4,000 of qualified education expenses if you earn less than $65,000 ($130,000 if you're married filing jointly). The deduction is limited to $2,000 if your income is between $65,000 and $80,000 ($130,000 and $160,000 if married filing jointly).
• Must include Form 8917 with your tax return and wait until February 14, 2011 to file.

Hope Credit; 2008 tax years and earlier

• only includes tuition and fees you are required to pay to the institution as a condition of enrollment or attendance - typically does not include books
• available for only the first two years of post-secondary education - usually the freshmen and sophomore years
• Maximum credit for each student is $1,800 (100% of the first $1,200 of expenses, 50% of the next $1,200 of expenses)
• Credit can only reduce your tax liability dollar for dollar
• The full credit is available to individuals whose modified adjusted gross income is $48,000 or less, or $96,000 or less for married couples filing a joint return.
• Include Form 8863 with your tax return.

Given the different options available, your best bet is to calculate your refund under each method and pick the best result. Also note, since Form 8917 is a deduction on page 1 of Form 1040, you should consider state income tax advantages.

An eligible educational institution is required to issue a Form 1098-T to each student by January 31 of the year following the year of the academic periods for which the expenses were paid.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Please refer IRS Publication 970 for more information.