Help for College from the IRS
Most students know, or at least are informed by their guidance counselors, that Uncle Sam helps out with the rising costs of college through grants and guaranteed loans. If you are looking for money for college, the Free Application for Federal Student Aid (FAFSA) is the place to start. What many people don't realize is that there are specific tax breaks you can get when you file your income tax return.
Eligibility
Most tax breaks for education are only for students who are working towards a degree at an accredited institution. Specifically, the school must be approved by the US Department of Education to receive federal funds such as loans and grants. Also, if the student is claimed as a dependent on a parent's return, only that parent (or parents if they file jointly) can claim the tax credits; otherwise, the student gets the credit. Generally tuition and fees are the only expenses eligible to be used to claim the tax credits. Finally, many benefits are phased out for people with high incomes; the figures I give are for low to moderate income taxpayers.
Timing
Tax benefits must be claimed in the year the expenses are actually paid. If a loan is used, the expenses are considered paid when the promissory note is signed. This is an opportunity to customize your tax bill: if you prepay your expenses, you can claim them earlier.
Types of Benefits
There are several different tax benefits available, and you are allowed to choose which one is most advantageous. One important point you need to know is that generally each student can only receive one tax credit per year. If you have more than one student on the return, you can mix and match.
· Hope Credit
The Hope Credit has been around for a while, but it was replaced by the American Opportunity Credit in 2010. It covered the first two years of college.
· American Opportunity Credit
The American Opportunity Credit (AOC) covers 100% of the first $2000 of expenses and 25% of the next $2000, per student. Each student claiming the AOC must not have completed four years of college before January 1 of the year for which the return is filed. The American Opportunity Credit can be claimed a maximum of four times per student. The AOC is unique in that up to $1000 is refundable, which means you may get it even if you don't owe that much in taxes.
· Lifetime Learning Credit
No restrictions apply to how many years the Lifetime Learning Credit can be used. However, $2000 is the maximum that can be deducted on one return, no matter how many students are claiming it. The amount of the credit is 20% of eligible expenses, up to $10,000.
· Tuition deduction
Unlike the other three benefits, which directly reduce your taxes, the tuition deduction reduces the amount of your taxable income. This can be useful if you are close to an income limit for some other tax benefit or tax bracket. 100% of tuition up to $4000 is deductible.
