In recent years, tax law has been very kind to education. For years, the Hope Credit and the Lifetime Learning Credit have been instrumental in making post-secondary education more affordable to many Americans. While you could argue that these credits may have contributed to the rising costs of college, as they shift the cost burden from the student to the taxpayers, that doesn’t mean you shouldn’t be educated about them. Last year, when the president signed the American Recovery and Reinvestment Act of 2009 into law, it changed the education tax benefit landscape by created an American Opportunity Credit. In this post, we’ll take a look at this and existing tax benefits for education.
American Opportunity Credit
The American Opportunity Credit was created by the American Recovery and Reinvestment Act of 2009 and is a modification on the Hope Scholarship Credit for the 2009 and 2010 tax years. It expands the amount of the Hope Scholarship Credit to 100% of qualified tuition, fees, and materials on the first $2,000 and 25% of the next $2,000 with the total credit not to exceed $2,500. It is a partially refundable tax credit, 40% of the credit is refundable.
The credit is subject to income phaseouts. Single filers can claim the full credit if their income is below $80,000. Single filers with incomes between $80,000 and $90,000 would only receive a partial credit and those with incomes over $90,000 would not get the credit. The range is $160,000 to $180,000 for married filing jointly filers. Finally, if you claim the American Opportunity Credit for one dependent student, you must claim it for all of them. You can’t claim the American Opportunity Credit for one student and then the Hope credit for another.
The American Opportunity Credit replaces the Hope Credit for more taxpayers but you may be eligible for a larger Hope Credit, up to $3,600, if you are attending an eligible institution in a Midwestern disaster area. The MAGI phaseouts for the Hope credit start at $50,000 and end at $60,000 for single filers and $100,000 to $120,000 for married filing jointly. As you can see, the ranges are much lower than the American Opportunity Credit.
The Hope Credit is nonrefundable, only available for the first two years of post-secondary education, and you cannot claim it if you claim either the Lifetime learning credit or the American opportunity credit.
Lifetime Learning Credit
The Lifetime Learning Credit is another credit made somewhat obsolete by the American Opportunity Credit. It is a credit for qualified tuition and related expenses for post-secondary education. Whereas the Hope Credit applies to the first two years and the American Opportunity Credit applies to the first four, there is no such requirement for the Lifetime Learning Credit. The credit is 20% of the first $10,000 of expenses in total, with a maximum of $2,000 per return. For students at an eligible institution in a Midwestern disaster area, the credit is 40% of the first $10,000 of expenses up to $4,000 per return.
The income phaseouts match those of the Hope credit, $50,000 to $60,000 for single filers and $100,000 to $120,000 for married filing jointly.
Tuition and Fees Deduction
If you can’t claim any of the above credits but your MAGI is less than $80,000 as a single filer and $160,000 as a married filing jointly, you may be able to claim the Tuition and Fees Deduction. It’s a deduction from your income, so it’s not as good as a credit, but you can deduct up to $4,000 from your income even if you don’t itemize. For single filers with a MAGI under $65,000 ($130,000 for married filing jointly), the maximum deduction is $4,000. Single filers with MAGI greater than $65,000 but less than $80,000, the maximum deduction is $2,000 ($130,000 to $160,000 is the range for married filing jointly). Single filers with MAGI greater than $80,000 ($130 for married filing jointly) cannot take this deduction.
State 529 Plans
You may be eligible for a state income tax deduction if you contribute to a 529 plan in your state. For example, in Maryland, we can get a Maryland State income deduction on contributions to $2,500 per beneficiary every year. Review your state’s programs and weigh them against the costs to make a final decision.
That should wrap up all the tax benefits for education this year. If there is one that I missed, please let me know!