College tax credits are an important part of student college financial aid plan that parents, education counselors, students and young adults should be aware of. Below is specific information about American Opportunity Credit and the Lifetime Learning Credit and how you can benefit from them:
The American Opportunity Credit is an IRS tax credit for education, instituted by President Barack Obama. This tax credit became effective in 2009 and was originally available for tax years 2010, 2011 and 2012. The purpose was to make college more affordable by directly reducing the amount of money a person owes in taxes. It was part of the American Recovery and Reinvestment Act of 2009, and it provides up to $2,500 for each eligible college student per year. 40% of this is a refundable credit, meaning you can receive $1,000 even if you owe no taxes. Typically this is used for college students who are dependents on their parents return, or adults over age 24. Recent legislation extended it to 2013 through 2017.
Even if you are not in a high tax bracket, a tax credit may help pay for college. As long as a student is attending a degree program half-time or more, and has not already completed four years of college and is under the age of 24, they can be eligible. For those over the age of 24, they may claim this credit through the Lifetime Learning Credit, another popular U.S. college tax credit. The Lifetime Learning Credit tax credit allows a taxpayer to deduct 20% of college tuition and fees, up to $10,000, which can equal a $2,000 tax credit. The credit may be used for taxpayer, spouse and dependent children.
For both the American Opportunity Credit and the Lifetime Learning Credit, you need to use the Federal Tax Form # 8863 for Educational Credits.
In 2012, the Lifetime Learning Credit is phased out for single taxpayers with incomes between $52,000 and $62,000, or ($104,000 to $124,000 for married taxpayers filing jointly). Unlike the American Opportunity Tax Credit, this Lifetime Learning Credit does not require the student to be studying toward a degree, enrolled at least half-time, or limit on number of years it may be taken.
For those have been unaware of this “free money”, such as my son who insisted on completing his own return last year, he was able to re-file his 2011 return this year. He’ll receive $1,000 for 2011 and $1,500 for his 2012 independent tax filing.
For 2012 tax returns, the tuition and fees tax deduction maximum is $4000 for adjusted gross income less than $65,000 or $130,000 for joint filers. Tax deductions are limited to $2,000 for single taxpayers with incomes between $65,000 and $80,000, or $130,000 to $160,000 for married taxpayers filing jointly.
Lisa Mark, MA