BOSTON (CBS) – College is very expensive. Congress and the IRS have given us ways to offset education costs.
1. The American Opportunity Credit – This credit can help parents and students pay part of the cost of the first four years of college. Congress modified the Hope Credit, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
The income limits: For singles, it phases out between $80,000 and $90,000 and those filing jointly it’s $160,000 to $180,000. This credit is due to expire at the end of 2013.
2. The Lifetime Learning Credit – This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years it takes you to get a degree. Eligible taxpayers may qualify for up to $2,000.
3. Tuition and Fees Deduction – Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American Opportunity or Lifetime Learning credits. You do not have to itemize to get this deduction!
4. Student Loan Interest Deduction – There also is the deduction for the interest you pay on your student loans. Limit is $2,500 for the year. As usual there are income limits as well. The deduction is phased out for incomes between $60,000 and $75,000 and there is no deduction once your income reaches $75,000. If you are married filing jointly it’s $120,000 and gone once you reach $150,000. This deduction can also be used whether you itemize or file the short 1040.
You cannot claim the American Opportunity and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim a Tuition and Fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse, or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.
5. 529 College Savings Plans – Although not a credit or a deduction it is worth mentioning that the income generated in a 529 plan is free of federal taxes. And Congress expanded the definition of qualified higher education expenses to include expenses for computers and Internet access.