Money Matters/ Tax credits can make college education more affordable
Published 4:19 pm, Thursday, August 23, 2012
As college tuition costs continue to rise, many people look into education loans, but don't know that they may be eligible for tax credits to ease the cost of higher education.
Jeffrey and Carol are sending their daughter off to college this fall. That's the good news. The bad news, of course, is paying for it. The couple isn't that worried. They have a college savings plan for tuition and have budgeted for other expenses. But they still could use some tax relief for the costs they'll incur. To see what's available, Jeffrey and Carol paid a visit to their financial adviser.
He confirmed that a federal tax credit may help, the American Opportunity credit or the Lifetime Learning credit.
One or the other
To qualify for either credit, their adviser began, Jeffrey and Carol must pay for their daughter's post-secondary tuition and fees themselves. (Expenses paid for with a tax-free Section 529 plan or Coverdell Education Savings Account distributions can't be used to claim a credit.) Qualified expenses beyond tuition and fees include course-related books, supplies and equipment.
But the couple had to make a choice. They can't claim both credits for their daughter's qualified expenses on their 2012 return. Their adviser recommended the American Opportunity credit and explained why.
Credit vs. credit
Both credits have modified adjusted gross income phaseouts:
The full American Opportunity credit is available to eligible taxpayers with MAGI of less than $80,000, or $160,000 for married couples filing jointly. The full Lifetime Learning credit, on the other hand, is available to eligible taxpayers with MAGI of less than $52,000, or $104,000 for joint filers.
Jeffrey and Carol's adviser projected that their 2012 joint MAGI would fall right around $104,000. So their Lifetime Learning credit might be partially phased out, but they'd likely be eligible for the full American
Also, the American Opportunity credit can go up to $2,500 per eligible student. The Lifetime Learning credit maxes out at $2,000 per tax return. The American Opportunity credit is available for the first four years of post-secondary education and requires, among other things, that the student be pursuing an undergraduate degree or other recognized educational credential, so their daughter would meet those requirements.
However, their adviser added, that doesn't mean the couple should ignore the Lifetime Learning credit. Because it's available for all years of post-secondary education and for courses to acquire or improve job skills, they may be able to use it eventually for their daughter or even for themselves.
"The American Opportunity credit it is," Carol said. The adviser agreed it appeared to be the better option. And he encouraged them to check with him closer to tax time to ensure they had the proper documentation for claiming the credit.
This is a general discussion and is not intended as advice. Always discuss your particular situation with your tax adviser before taking any actions.
Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at n.grill@GRILL1.com.