ALBANY - The federal American Opportunity Tax Credit provides a tax credit of up to $2,500 per student to offset qualified higher education expenses. Every dollar of tax benefits reduces the need for funds from more expensive sources, like loans. Students and families with higher education expenses need to remember these all too often overlooked educational benefits as they prepare their 2011 federal and state tax returns.
Here are some key features of the American Opportunity Tax Credit:
The credit is equal to 100 percent of the first $2,000 spent, and 25 percent of the next $2,000 spent on qualified higher education expenses. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
Tuition, related fees, books and other required course materials generally qualify.
The credit is available for taxpayers whose modified adjusted gross income is $90,000 or less - for married couples filing a joint return, the limit is $180,000. The credit is phased out for taxpayers with incomes above $80,000 - $160,000 for married couples filing jointly.
Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who have no tax liability can get a payment of up to $1,000 for each eligible student.
This credit applies for the 2009 through 2012 tax years. Parents and students may claim the credit on their 2011 tax returns, and may amend their previous returns if they were eligible but did not take advantage of the credit.
For details on the American Opportunity Tax Credit and the other education-related tax benefits, see IRS Publication 970.
The American Opportunity Tax Credit is allowed for 4 tax years per eligible student. Education expenses for additional tax years may still qualify for the Lifetime Learning tax credit.
The lifetime learning tax credit
Up to $2,000 in Lifetime Learning Tax Credit may be claimed for qualified education expenses per tax return. The qualifying student can be anyone in the family who appears on your tax return. If you claim the American Opportunity credit for one or more students in your family, you can't apply their expenses to a Lifetime Learning credit. However, you can still take a Lifetime Learning credit for family members who have exhausted or are not eligible for the American Opportunity Tax Credit. This may be especially helpful for graduate students.
The maximum credit that can be received is limited to the tax you owe. You are eligible for the credit if your modified adjusted gross income is $61,000 or less - for married couples filing a joint return, $122,000 or less. However, the credit is phased out for taxpayers with incomes above $51,000 - $102,000 for married couples filing a joint.
Tuition and fees deduction
Alternatively, taxpayers can claim a tuition and fees deduction that can reduce a taxpayer's income subject to tax by as much as $4,000. The deduction is taken as an adjustment to income so taxpayers need not itemize their deductions to claim it. It is available to taxpayers whose modified adjusted gross income is $80,000 or less - for married couples filing a joint return, the limit is $160,000. The deduction is reduced for taxpayers with incomes above $65,000 - $130,000 for married couples filing jointly.
The 1098-T statement
The information you will need to take the American Opportunity or Lifetime Learning tax credits, or the Tuition and Fees deduction, will be included on a 1098-T statement you should receive from your college either by mail or electronically. The 1098-T lists the amount billed and payments received by the college, any scholarships or grants received by the student, and reimbursements or refunds issued by the college.
Student loan interest deduction
The Student Loan Interest Deduction can reduce your taxable income by as much as $2,500. It is taken as an adjustment to income, which means you can take this deduction, even if you do not itemize deductions on the Schedule A form of Form 1040. You can deduct the interest paid on a student loan taken for yourself, your spouse or a family member. The amount of the deduction is dependent upon the amount of interest paid and your income. You are eligible for the deduction if your modified adjusted gross income is $75,000 or less - $150,000 or less if filing a joint return. Look for a 1098-E statement from your student loan lender or servicer that will list the amount of student loan interest paid by the borrower.
New York State offers college tax relief, too
New York State offers a college tuition credit of up to $400 for each eligible student or up to a $10,000 deduction for each eligible student, depending on which is better for you on your 2011 State taxes.
A full-year New York State resident, not claimed as a dependent on someone else's return may claim the credit. However, a New York State resident, nonresident, or part-year resident may be eligible for the deduction. You, your spouse or other dependent family member must have been an undergraduate student and paid qualified tuition expenses.
To see if you qualify and determine whether the credit or deduction is best for you, visit the New York State Taxation and Finance Department website and review the instructions for Form IT-272.