Tax Credits That Can Offset the Cost of Higher Education

It is the time of year when many high school seniors are getting accepted to colleges. It is an exciting time for students and their families, but the cost of higher education can keep parents up late at night. Remember that there are two higher education credits that could help parents offset some of the costs when filing their 2011 or 2012 returns: the American Opportunity (modified Hope) Credit and the Lifetime Learning Credit. Parents should use the Form 8863 to claim the credits. The credits are not permitted to be claimed by more than one taxpayer in the same year (either the parent or the child takes the credit, not both). Also, the credits cannot be claimed using the same expense for which another tax benefit is also received (the same expenses cannot qualify for two different credits).

The American Opportunity Credit is a credit for 2011 and 2012 years. The credit amount is the sum of 100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. Up to 40% of the credit amount is refundable should the taxpayer's tax liability be insufficient to offset the nonrefundable credit amount. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

The Lifetime Learning Credit is equal to 20% of the amount of qualified tuition expenses paid on the first $10,000 of tuition. A student is eligible for the lifetime learning credit if the student is enrolled in one or more courses at a qualified educational institution. The allowable amount of the lifetime learning credit is reduced for taxpayers who have modified AGI above certain amounts. The phase-out of the credits begins for single taxpayers in 2011 when modified AGI reaches $51,000 ($52,000 in 2012) and completely phases out when modified AGI reaches $61,000 ($62,000 in 2012). For joint filers, the phase-out range is $102,000 to $122,000 in 2011 ($104,000 to $124,000 in 2012).

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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