Parents and Students: Check Out College Tax Benefits for 2012 and Years Ahead

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WASHINGTON — The Internal Revenue Service today reminded parents and studentsthat now is a good time to see if they qualify for either of two collegeeducation tax credits or any of several other education-related tax benefits.
In general, the American opportunity tax credit, lifetime learning creditand tuition and fees deduction are available to taxpayers who pay qualifyingexpenses for an eligible student. Eligible students include the primarytaxpayer, the taxpayer’s spouse or a dependent of the taxpayer.
Though a taxpayer often qualifies for more than one of these benefits, he orshe can only claim one of them for a particular student in a particular year.The benefits are available to all taxpayers – both those who itemize theirdeductions on ScheduleA and those who claim a standard deduction. The credits are claimed on Form8863 and the tuition and fees deduction is claimed on Form8917.
The American Taxpayer Relief Act, enacted Jan. 2, 2013, extended theAmerican opportunity tax credit for another five years until the end of 2017.The new law also retroactively extended the tuition and fees deduction, whichhad expired at the end of 2011, through 2013. The lifetime learning credit didnot need to be extended because it was already a permanent part of the taxcode.
For those eligible, including most undergraduate students, the Americanopportunity tax credit will yield the greatest tax savings. Alternatively, the lifetime learning credit should be considered by part-timestudents and those attending graduate school. For others, especially those whodon’t qualify for either credit, the tuition and fees deduction may be theright choice.
All three benefits are available for students enrolled in an eligiblecollege, university or vocational school, including both nonprofit andfor-profit institutions. None of them can be claimed by a nonresidentalien or married person filing a separate return. In most cases, dependentscannot claim these education benefits.
Normally, a student will receive a Form1098-T from their institution by the end of January of the following year.This form will show information about tuition paid or billed along with otherinformation. However, amounts shown on this form may differ from amountstaxpayers are eligible to claim for these tax benefits. Taxpayers should seethe instructions to Forms 8863 and 8917 and Publication970 for details on properly figuring allowable tax benefits.
Many of those eligible for the American opportunity tax credit qualify forthe maximum annual credit of $2,500 per student. Here are some key features ofthe credit:

• The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify. Any student with a felony drug conviction also does not qualify.
• Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
• Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student. Other education-related credits and deductions do not provide a benefit to people who owe no tax.

The lifetime learning credit of up to $2,000 per tax return is available forboth graduate and undergraduate students. Unlike the American opportunity taxcredit, the limit on the lifetime learning credit applies to each tax return,rather than to each student. Though the half-time student requirement does notapply, the course of study must be either part of a post-secondary degreeprogram or taken by the student to maintain or improve job skills. Otherfeatures of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
• Income limits are lower than under the American opportunity tax credit. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, heads of household and some widows and widowers whose MAGI is $62,000 or more.

Like the lifetime learning credit, the tuition and fees deduction isavailable for all levels of post-secondary education, and the cost of one ormore courses can qualify. The annual deduction limit is $4,000 for joint filerswhose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 orless. The deduction limit drops to $2,000 for couples whose MAGI exceeds$130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds$65,000 but is no more than $80,000.
Eligible parents and students can get the benefit of these provisions duringthe year by having less tax taken out of their paychecks. They can do this byfilling out a new FormW-4, claiming additional withholding allowances, and giving it to theiremployer.
There are a variety of other education-related tax benefits that can helpmany taxpayers. They include:

• Scholarship and fellowship grants—generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Student loan interest deduction of up to $2,500 per year.
• Savings bonds used to pay for college—though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be ableto claim a dependent exemption and the earned income tax credit.
The general comparison table in Publication970 can be a useful guide to taxpayers in determining eligibility for thesebenefits. Details can also be found in the TaxBenefits for Education Information Center on IRS.gov.