The following are tax breaks to consider as you prepare for the upcoming tax season.
Lifetime Learning Tax Credit
On a dollar-for-dollar basis, you can reduce your taxes by claiming the lifetime learning tax credit. This credit isn’t just for dependents either — one or both parents can take it if they are enrolled in a post-secondary class.
The credit covers the cost for tuition, fees, and books as well as related supplies. The top credit you can take is 20 percent up to a maximum of $10,000 for a $2,000 tax credit. See IRS Form 8863; look for Form 1098-T from your post-secondary school.
American Opportunity Tax Credit
Originally set to expire at the end of 2010, the American Opportunity Tax Credit was extended to end in 2012, then given a further extension by five years. The AOTC is part of the American Recovery and Reinvestment Act (ARRA). The AOTC modified the original Hope Credit.
The IRS notes that the full credit “is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return.” For taxpayers with higher incomes, the credit is phased out.
Keep in mind that the IRS does not allow you to claim the American Opportunity credit or a tuition deduction in the same year you claim the Lifetime Learning credit. Only one tax deduction per student, per year is allowed.
Tuition and Fees Deduction
If you do not itemize your deductions, you may be able to deduct up to $4,000 for qualified tuition and fees paid for post-secondary eduction. Those qualified fees and tuition include what you paid personally, your spouse or a dependent.
To qualify of the maximum deduction your adjusted gross income can be no higher than $65,000 per year or $130,000 if married filing jointly. The deduction does not apply to you if you take the American Opportunity Credit or the Lifetime Learning Credit. There are other exceptions that your tax advisor can discuss with you.
Student Loan Interest Deduction
Student loan debt can make or break you. The IRS gives taxpayers a break now by allowing them to deduct interest for federal or private student loans.
The annual deduction for student loans is capped at $2,500. You need not itemize your deductions and it is counted as an adjustment to your income. That means if you earned $65,000 in the past year, then your claimed income may drop to as low as $62,500. See IRS Topic 456 for more information.
The Cost of Higher Education
Educational costs continue to rise, but the federal government provides some relief through various tax deductions and credits. Your state may offer relief too — check with your financial advisor for more information.
See Also — Tips for the Unemployed and Financially Strapped Recent Graduate
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