Education Tax Credits

We continually hear and read reports on the escalating cost of higher education. However, two tax credits are available to provide some relief for taxpayers who are paying these education costs for themselves or family members. The American Opportunity Tax Credit and Lifetime Learning Credit are available in 2012 to help students and parents cover the cost of higher education. Taxpayers will generally use the American Opportunity Tax Credit, as opposed to the Lifetime Learning Credit, since it will yield a greater monetary benefit.

The American Opportunity Tax Credit is a per student credit that may be claimed for each eligible student pursuing an undergraduate degree or other recognized education credential. The student must be enrolled at least half-time for one academic period to qualify for the credit.

The maximum American Opportunity Tax Credit is $2,500 per student in 2012 based on 100% of the first $2,000 and 25% of the next $2,000 of the qualified tuition and related expenses paid during the tax year for education furnished to an eligible student. Qualified expenses include tuition and fees and course-related books, supplies, and equipment. Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000 even if you owe no taxes. This credit does phase out, but is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000, or $160,000 for married couples filing a joint return.

Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is a per taxpayer (per return) credit, rather than a per student credit. It is available for all years of postsecondary education, including graduate level degree work, and for courses to acquire or improve job skills (e.g., work-related community college courses). The student does not have to be pursuing a degree or other recognized education credential to obtain the credit.

For 2012, the maximum Lifetime Learning Credit allowed is $2,000 (20% of up to $10,000 of the aggregate qualified tuition and related expenses paid during the tax year for education furnished to an eligible student during any academic period). Qualified expenses include tuition and fees and course-related books, supplies, and equipment, but only if required by the eligible education institution for enrollment. The maximum credit is limited to the tax you must pay on your return—the credit is nonrefundable. (Special rules apply for AMT.)This credit does phase out, but the full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $52,000, or $104,000 for married couples filing a joint return in 2012.

Although several of the rules and requirements are the same for both education credits, taxpayers can elect to claim only one of these credits for the same student in a tax year. However, this does not prevent a taxpayer from claiming a different credit (or the same credit) for different students in the same tax year.

 

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