I want to share some of the biggest ones available right now so you can see which one your family would qualify for and would benefit from the most when you prepare your taxes before the tax deadline.

American Opportunity Credit

Originally called the Hope Credit, the American Opportunity Credit allows those seeking a post-secondary education a tax credit of up to $2,500 per qualifying student. Qualified expenses include tuition and fees.

It has been expanded from covering 2 years to 4 years and now you can claim the expenses you paid for required course materials.

Lifetime Learning Credit

Like the American Opportunity Credit, the Lifetime Learning Credit allows you to receive credit for qualified education expenses you paid.

There is no limit to the number of years you can use the Lifetime Learning Credit, so if you’re taking classes to keep certified, this may be an option for you. Please be aware that you can not claim both the American Opportunity Credit AND Lifetime Learning Credit in the same year.

Deducting Tuition and Fees

If your income doesn’t allow you to take advantage of the American Opportunity or Lifetime Learning Credit, you may still be able to deduct some of your education expenses under the Tuition and Fees Deduction. This deduction can be worth up to $4,000, lowering your taxable income for the year.

To qualify for this deduction, please make sure that you’re claiming this for either yourself, your spouse, or your dependent.

Student Loan Interest Deduction

Just because you finished college doesn’t mean you have no tax breaks. If you have student loans, you may be able to deduct the interest you paid on the loans in 2012. If you meet the income requirements (modified adjusted gross income (MAGI) is less than $75,000 for single filers and less than $155,000 for those married filing jointly) then you may be able to deduct up to $2,500.

Even better, you don’t have to itemize your deductions to claim this on your taxes. Federal student loans would meet the criteria for deducting student loan interest, but a loan from a relative would not.

Thoughts on College and Tax Breaks

There are other tax deductions you may want to look into, including setting up tax advantage accounts for your younger children who won’t be attending college for some years. Using tax software like TurboTax can help you uncover what you’re entitled to and simplify filing your taxes so that you can keep more money in your pocket.

I’d love to hear from you about your family’s take on this topic. If someone in your family is going to college, which tax credits and deductions have you used?

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How Much is the Educator Expense Deduction?

The maximum Educator Expense Deduction is $250 per individual.  In the event both spouses are educators and each spends at least $250 on qualified educator expenses, the maximum deduction on their joint return is $500.

What Expenses Qualify for the Educator Expense Deduction?

The IRS has determined that the following expenses qualify for the deduction:

• supplies
• computer equipment (including related software and services)
• other equipment, and
• supplementary materials that you use in the classroom

Keep in mind that health and physical education teachers who incur educator expenses must use them in athletic education to qualify for the deduction.  In addition, all expenses must be unreimbursed to be deductible (If you’re not out-of-pocket due to the expenditure, you didn’t really incur the expense).

Who Qualifies for the Educator Expense Deduction?

Not surprisingly, you must be an educator to be able to take the deduction.  This means you can be a teacher, instructor, an aid, or pretty much anyone who spends 900 hours or more per year in a elementary or secondary school.  Principals qualify too, but home school educators do not.

In addition, you must file either file a Form 1040 or a Form 1040A to deduct your educator expenses.  While some tax deductions require taxpayers to itemize in order to benefit, the Educator Expense Deduction does not. As a result, every taxpayer with the bona fide educator expenses described above will save money on their taxes.

TurboTax walks you through the appropriate tax questions to make sure you get this tax deduction if you’re eligible, so you can keep more of your hard-earned money.  If you still have questions, only TurboTax lets you talk to CPAs, IRS enrolled agents, or tax attorneys while you prepare your taxes, free.

Teacher’s Educator Expense Deduction

As you gather together your paperwork for 2011, don’t forget the educator expense tax deduction. It’s available to teachers, instructors, counselors, principals and aides for grades K-12 who work at least 900 hours during the school year. (Parents who home school their children are out of luck, since the costs for home schooling aren’t eligible for this deduction.)

If you qualify, you can claim up to $250 of your out-of-pocket expenses for classroom supplies, materials, books, computer equipment, software, other equipment, and supplementary materials, as long as you didn’t receive reimbursement. You don’t have to itemize your deductions either.

If you and your spouse are both teachers, you can double up and each claim the deduction for a combined deduction of $500. Of course, you can’t each claim a deduction for the same costs, so be sure to split the purchases between you for maximum tax savings.

Now for the fine print, which affects just a few people:

• If you teach courses in health and physical education, your expenses for those courses must be related to athletics.
• The educator expenses have to exceed any interest on US savings bonds that were used to pay education expenses and excluded from income.
• The expenses must exceed any tax-free distributions from a 529 plan or other tuition program that you excluded from income, including any tax-free withdrawals from your Coverdell Education Savings Account.

Congress decided a few years ago to give teachers a break temporarily. Though Congress extended the deduction each time it was set to expire, it wasn’t extended this year, so as things stand now there is no educator deduction for 2012. But it wouldn’t hurt to hang onto your receipts for 2012 just in case Congress acts to reinstate it later this year.

Interactive by Column Five

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Student Loan

Luckily, most taxpayers who make student loan payments on a qualified student loan will get a little relief. A qualified student loan is a loan you took out solely to pay higher education.

In most cases, the interest portion of your student loan payments during the tax year is tax deductible. Your deduction is limited to interest up to $2,500 or the amount of interest you actually paid whichever is less.  As with most tax credits and deductions, there are limits in place.

You can deduct student loan interest if:

• You paid interest on a qualified student loan in the tax year
• You are legally obligated to pay interest on a qualified student loan
• Your filing status is not married filing separately
• You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s tax return
• You are a single filer with income under $60,000, however your full tax deduction phases out between $60,000 and $75,000. Income limits are double for joint filers. If your income falls above those limits, it is not deductible at all.

The other good news regarding the student loan interest deduction is that you do not need to itemize deductions in order to claim it. This makes sense considering many recent college graduates are not itemizing deductions.

If you paid more than $600 in interest to a single lender during the year you should receive a 1098-E form showing how much interest you paid for the year. If you made student loan payments but did not receive a 1098-E, you are still entitled to claim the interest deduction, but you may need to call the lender or pull up your records online.

When filing your taxes, don’t forget about this tax deduction and remember that TurboTax will calculate the deduction for you if you are eligible.

Interactive by Column Five

Have you used any of these saving methods?  Which ones?  Don’t forget some of your college expenses may be tax deductible.

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Who Should Take Education Tax Benefits

Is the Student a Dependent?

First of all, you need to determine if the student is a dependent. If a parent claims his or her student as a dependent, then that’s who gets to take the tax credit or education deduction. Whether it’s the American Opportunity Tax Credit, Lifetime Learning Credit, or the Tuition and Fees Deduction, only one person gets the tax advantage and it often comes down to whether the student is a dependent in the eyes of the IRS. If a student is a dependent on someone else’s tax return, the student doesn’t qualify for these tax breaks.

If a student isn’t claimed as a dependent, though, it’s possible for him or her to claim an education tax credit, or take the deduction.  One thing to keep in mind, each student cannot claim more than one tax break. So it’s one of the education credits or education deduction (not all of them).

Should the Student Take the Tax Credit or Deduction?

In some cases, it makes sense for the student to take the tax break. If the student is married, and no longer dependent on a parent for support, obviously that’s who should take the education tax break. Additionally, if the student makes enough money to owe taxes, it makes sense to reduce that tax bill as much as possible.

Most of the time, though, students don’t earn enough money to owe taxes. As a result, in many cases, it makes more sense for parents to claim their children as dependents and reap the benefits of the tax breaks. After all, parents have spent quite a lot to raise their children, and probably help pay for college. It’s only reasonable that they receive some sort of financial benefit in return – and a lower tax bill is one way to recoup a few of those costs.

Once you have made your decision about who will claim the education tax benefit, TurboTax will figure out which education tax credit or deduction you are eligible for when you prepare your taxes.

Education Expenses

If you are looking for a way to offset some of your education costs, the government offers some tax credits and deductions designed to help students and their parents. While these tax breaks won’t completely cover the cost college, they can reduce some of the pain involved.

American Opportunity Tax Credit

The American Opportunity Tax Credit is offered to students who pay qualified tuition (and aren’t claimed as dependents elsewhere), as well as to parents who pay expenses for their dependent students or themselves. Replacing the Hope Credit, the American Opportunity Credit offers some modified rules, which make it available to more students. Normally, the Hope Credit only allowed you to use it on the first two years of post-secondary education, and the modification allows for up to four years, as well as raising the income limits, and expanding qualified expenses.

The popular American Opportunity Credit was set to expire at the end of 2010. However, it has been extended through the end of 2012. This tax credit allows you to claim up to $2,500 per student. The full credit is available for individuals with a MAGI(Modified Adjusted Gross Income) of $80,000 or less, $160,000 for married filing jointly. It is 40% refundable, meaning that you can get up to $1,000 back even if you don’t owe taxes.

Lifetime Learning Credit

Rather than limiting your ability to get tax credits for education expenses for the first four years of college, it’s possible to use the Lifetime Learning Credit to offset your expenses even in graduate or professional school. As long as the educational institution is qualified, undergraduate or beyond, you can qualify for up to $2,000 in tax credits for your expenses. It’s figured on 20% of your tuition and fees, up to the first $10,000. There is a phase out as you reach certain income levels. Parents can claim this for dependent students.

Deduction for Tuition and Fees

Unlike the credits, which are dollar for dollar reductions in how much tax you owe, deductions reduce your income. You still receive a benefit; it just isn’t as pronounced. You can take a deduction for up to $4,000 spent on college tuition, and on related expenses.

Limitations to These Tax Breaks

Realize that there are limitations to the tax breaks you can take. If you claim the Tuition and Fees Deduction, you can’t take any of the credits. Additionally, you can’t claim the American Opportunity and Lifetime Learning credits for the same student in the same year. If you are a parent with multiple dependent students, you can spread these credits around a little bit to maximize your return.

Carefully consider your tax situation as you decide what is best. Remember that a credit is far more valuable than a deduction. For example, a $2,000 tax credit means a direct $2,000 reduction in tax liability. A deduction reduces your taxable income, so assuming you are in the 25% tax bracket, you would need a $8,000 deduction to get the same reduction in liability as a $2,000 tax credit.

Finally, don’t worry about figuring out which education credit or deduction to take.  TurboTax easily chooses the best option for you depending on your eligibility.

Education Credits and Deductions

• American Opportunity Tax Credit – (A modification to the Hope Credit) This tax credit is for up to $2500 per eligible student. It is available for couples filing joint with income up to $180,000 or $90,000 if single. 40% of the credit may be refundable, this means that if this tax credit is greater than your total tax for the year, you may get a check from the IRS for up to $1000 in addition to the tax you already paid.

Other requirements for this education tax credit include the fact that the student must be enrolled at least half time for at least one academic period during the tax year, and as of the end of 2011, the student must not have any felony drug convictions. Last, note that qualified expenses include not only tuition, but any enrollment fees, and required course material.

• Lifetime Learning Credit – The rules for this credit are a bit different from the American Opportunity Tax Credit. The credit is worth $2000 per return (not per student) and there is no limit to number of years it may be taken, so long as it’s in effect. The credit may be taken for couples with income up to $122,000 or single filers with income up to $61,000. All years of post secondary school qualify for the credit as do any courses to acquire or improve one’s job skills.

The student doesn’t need to be registered for any number of classes, even just one class qualifies for the credit. Besides the tuition, fees, and books, both “supplies and equipment” also qualify. Felony drug conviction is not a disqualifier for this credit. Last, the credit in not refundable. It can only offset your tax bill, not refund in excess of what you paid.

• The Student Loan Interest Deduction – for some time, personal interest (credit cards, car loans, etc) has not been deductible, but student loan interest might be. For those with modified adjusted gross income (MAGI) of $150,000 or less for joint filers, $75,000 if single, interest up to $2500 per year may be taken as a deduction. This is a deduction directly against your income, not subject to the need to exceed the standard deduction to get on schedule A. The interest deduction is available until the student loan is paid off, or until canceled by congress.

• Tuition and Fees Deduction – This deduction is against income, skipping the Schedule A, and helping to reduce your taxable income if this benefits you more than either the American Opportunity Tax Credit or the Lifetime Learning Credit. The deduction is available for Joint filers whose MAGI is less than $160,000, $80,000 if single. The eligible expenses include Tuition and fees, but specifically exclude room and board.

No discussion of tax savings for college should ignore the savings accounts targeted for college expenses. Let’s take a look at the two popular ones.

• Coverdell Education Savings Account – When first introduced, this account was called the “Education IRA” which was a bit of a misnomer as the account has nothing to do with retirement. On the other hand, it bears a striking resemblance to the Roth IRA. The deposits to the Coverdell are not tax deductible, but grow and are withdrawn tax free if used for the beneficiary’s qualified education expenses. The deposit limit is $2000 per year, and there is a limit of MAGI of $220,000, $110,000 if single to make the deposit. Any funds not used for qualified expenses must be withdrawn by the time the beneficiary turns 30. Distributions that don’t qualify for college expenses are subject to tax as well as a 10% penalty. This account may be combined with the credits and deductions above, but not for the same exact expenses.

• Qualified Tuition Program – Commonly known as the 529 plan, this account has no income restrictions at all for deposits. The account deposit limit is currently $300,000 which is well over the amount that would be needed for any 4 year degree. Practically speaking, it’s common to limit deposits to the $13,000 gift limit ($26,000 if both parents deposit.)

One is also permitted to gift ahead up to five years with no gift tax due and not tapping into the unified lifetime gift tax amount. Withdrawals for qualified expenses are withdrawn tax free, but as with the Coverdell, tax and penalty apply if withdrawn with no qualifying expense.

One choice is to take the remaining balance and change the beneficiary for the account. Any close family member up to first cousin is eligible for the transfer. For those who are trying to get money out of their estate, this opens up the possibility to move significant sums of money out of their name to set up 529 accounts for their extended family.

There is no age restriction, so no rush to transfer funds. You can wait until your new graduate has children of her own and make them the new beneficiaries to educate the next generation. This account may be combined with the credits and deductions above (including the Coverdell), but not for the same exact expenses.

Educator Expense Tax Deduction

Who qualifies? If you are a teacher, instructor, counselor, principal or aide for grades K-12, you will qualify if you work at least 900 hours during the school year.

What expenses qualify? You can claim up to $250 of expenses for classroom supplies, materials, books, computer equipment, software, other equipment, and supplementary materials that you pay from your own pocket, as long as you didn’t receive reimbursement. Here’s a little fine print: If you teach courses in health and physical education, your expenses for those courses must be related to athletics.

Do I have to itemize my tax deductions? That’s the best part – you can take the Educator Expense Deduction even if you claim the standard deduction and even if you file the short form. TurboTax will easily guide you through an interview and put the tax deduction on the right form.

My spouse is a teacher – can he claim the tax deduction as well? More good news: you can each claim the tax deduction for a combined total of $500, even if you file a joint return. Of course, you can’t each claim a deduction for the same costs, so be sure to split the purchases between you for maximum tax savings.

What’s the catch? For most people, there is no catch, but certain educators with unusual situations may find their deductions limited. That’s because the expenses have to exceed any interest on US savings bonds that you excluded from income because they were used to pay education expenses, and any tax-free distributions from a 529 plan or other tuition program that you excluded from income, including any tax-free withdrawals from your Coverdell Education Savings Account.  See, I told you that those situations were unusual.

Congress decided a few years ago to give teachers a tax break temporarily, but each time the Educator Expense Deduction is set to expire it has been extended. It is set to expire again at the end of 2011, so don’t pass up this limited-time opportunity. There are no guarantees that the deduction will be around for future years, so take advantage of the tax break this year and buy those qualifying supplies before year end.

American Opportunity Credit

Well, the government has a nice back-to-school program for parents and college students. It’s called the American Opportunity Credit and it benefits full-time and part-time college students who will be enrolled in classes this fall.

The American Opportunity Credit falls under the umbrella of the American Recovery and Reinvestment Act (ARRA) and offers a maximum tax credit of $2500 per student. Through the ARRA, more parents and students will qualify for the updated tax credit, which aims to help a greater number of families with yearly college expenses.

The American Opportunity Credit modifies the Hope Credit by allowing the tax credit to be available to a larger group of applicants. The primary modification is the change to qualifying household income levels. The full amount of the credit ($2500 per student) is available to individuals whose modified adjusted gross income is $90,000 or less; or $180,000 or less for married couples filing a joint return.

This tax credit is phased out for households with incomes higher than these levels.

The American Opportunity Credit offers a higher tax credit limit than the former Hope Credit or the Lifetime Learning Credit. According to the IRS, “It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for the first four years of college instead of two.”

Lifetime Learning Credit

Another perk available to you if you paid qualified college expenses is the Lifetime Learning Credit.  The credit is up to $2,000 per tax return and may be available if your modified adjusted gross income is $61,000 or less ($122,000 if you are married filing jointly).  The advantage of the Lifetime Learning Credit is there is no limit on the number of years that the deduction can be claimed for each student, so being a professional student may pay off.  The credit is available even if you are taking one class, not pursuing a degree, or you are a graduate student.

529 Savings Plans

Tax-free college savings plans and prepaid college tuition programs can be used for a wide assortment of eligible higher-education expenses such as computer equipment, classroom materials, books, educational supplies, dorm fees, and tuition.

529 plans are tuition programs that have been qualified and authorized under section 529 of the Internal Revenue Code. Especially in recent years, they have become a wise and popular way for families to save for a child’s college education. Though contributions to 529 plans are not tax deductible, the perks are that there is no income limit for the contributors, your investments grow tax deferred, and distributions for qualified college expenses are tax- free.

529 plan distributions (money taken out of the account to pay for college-related expenses) are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. It is best to check with your 529 plan account manager and with the IRS to make absolutely sure your expense is qualified.

Authorized expenses can be tuition, required fees, books, supplies, equipment and special needs services. Room and board also qualify if the 529 plan beneficiary is at least an official half-time student.

Additions made to this list because of modifications made by the ARRA are “expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American Opportunity Credit, the Lifetime Learning Credit, or the Tuition and Fee Deduction.”

In short, you can use 529 plan distributions for a laptop and computer software requirements, but not an Xbox 360 or the latest DVD.

If your child is already in college, then it’s not going to do much good to start a new 529 plan. However, even if you have a child in high school, you still have time to contribute to a 529 plan and reap some of the benefits.

Tuition and Fees Deduction

If you do not qualify for the American Opportunity Credit and the Lifetime Learning Credit you may qualify for the Tuition and Fees Deduction if your modified adjusted gross income is $80,000 or less ($160,000 if married filing jointly). The Tuition and Fees Deduction is another education tax benefit available to taxpayers who pay for higher education.  The tax deduction was set to expire in 2009, but is now still available through 2011.

This deduction can directly reduce your taxable income by up to $4,000. Basically, this means you are able to claim this deduction even if you don’t itemize deductions on Schedule A (Form 1040).  Some of the other benefits of the tax deduction are it reduces your AGI, which may qualify you for other tax deductions and credits, there is no limit on the number of years the deduction can be taken, and it doesn’t matter how many college courses you have taken at once.

And don’t forget to keep track of the interest you’ve paid on your student loans; it’s tax deductible too. Thankfully, your student loan lender usually sends you a form prior to tax season that clearly states exactly how much interest you’ve paid.

Filing Taxes

April is still 7 months away, but that doesn’t mean you can’t start organizing pertinent tax information. It’s never too early to say, “Make sure you file your taxes.” It’s important to get a jump on things because there are so many deduction and tax considerations when dealing with college expenses.

It would be good idea to keep an ongoing record of your income, possible deductions, and available tax credits. You’ll never know just how many credits and other tax benefits you qualify for as a college student or parent of a college student if you don’t take the time to find out for yourself.