Education Tax Credits & Deductions 101

The so-called ‘Fiscal Cliff’ was recently avoided by Congress and with it came the extension of certain tax credits and deductions for college students and families.

The American Taxpayer Relief Act of 2012 allows parents and independent college students to continue obtaining deductions or credits from taxes owed based on certain expenditures on higher education. There are several opportunities to save on your annual tax payment.

Above-the-line Deduction

This tax break is allowed for fees and tuition paid for higher education by the tax filer or a dependent child. Up to $4,000 can be deducted above-and-beyond the standard deduction ($11,900 if married and filing jointly), even without itemizing. A smaller $2,000 deduction is also possible for some taxpayers depending on adjusted gross income.  Married people filing separately are not eligible nor are students that are claimed as dependents on their parent's return, as is the case with most all of the college-related credits.

Specifics include phasing out the credit for single filers with an adjusted gross income (AGI) above $65,000, or a joint filer with a modified AGI above $130,000. For those singles with an AGI between $65,001 and $80,000 or between $130,001 and $160,000 for joint filers, a reduced deduction of up to $2,000 is allowed.

Student Loan Interest Deduction

Up to $2,500 can be taken in a tax year but eligibility is phased out at certain levels of income based on marital status. Specifically, the 2012 phase-out range for unmarried taxpayers is between adjusted gross income of $60,000 and $75,000. For joint filers, the range is between modified AGI of $120,000 and $150,000.

American Opportunity Tax Credit

The American Opportunity credit allows families or independent students to claim up to 100% of the first $2,000 paid in tuition and fees plus 25% of the next $2,000. Therefore, the maximum tax break from this program is $2,500 and is only available during the first four years of a student's academic career. Students must be enrolled full-time for at least one academic term during the filing year to be eligible. The American Opportunity credit is phased out between AGI of $160,000 and $180,000 for joint filers and $80,000 to $90,000 for unmarried taxpayers.

Lifetime Learning Tax Credit

Still around from past years is the Lifetime Learning credit, which is less restrictive than the American Opportunity Tax Credit and is mainly intended to help defray college costs after the first four years, when AOTC eligibility expires. It is available for an unlimited number of years and does not have any minimum enrollment requirements. Continuing education and graduate courses are included as applicable expenses.

The Lifetime Learning credit equals 20% of tuition and fees up to $10,000 for a maximum annual credit of $2,000. This credit is phased out between AGI of $100,000 and $120,000 for joint taxpayers and $50,000 to $60,000 for single filers.

Some of the deductions and credits are exclusive. For example, you cannot claim the American Opportunity Credit in the same year you claim the tuition and fees tax deduction. But since a tax credit is better than a tax deduction, the American Opportunity Credit will be the better choice for most New Jersey families. Always consult your tax adviser.