There are a few valuable tax deductions and credits that parents and students can take advantage of for the 2011 tax year. Parents that are even high income earners can pass along certain tax breaks to their college kids.
The educational tax credits
The American Opportunity credit allows students and their parents to claim up to $2,500 of tuition and related expenses such as course materials during the first four years of college. Keep in mind that you will begin to lose the full benefit of this credit if your adjusted gross income (AGI) is $80,000 or greater ($160,000 if married filing jointly).
The Lifetime Learning credit allows eligible students enrolled in an educational institution for either a post-secondary degree (only needs to take one class) to claim up to $2,000. The credit beings to phase out if your adjusted gross income (AGI) is $51,000 or greater ($102,000 for joint filers).
Please note that you cannot claim both credits; it’s one or the other. Generally speaking, the American Opportunity credit offers more advantages than the Lifetime Learning credit. It is greater in value and you can have a higher income and still benefit from the full credit. The main attraction to the Lifetime Learning credit is that it can be claimed even if you are taking only one class which is not the case for the American Opportunity credit.
The Tuition and Fees Deduction
This tax break is a deduction which reduces your taxable income up to $4,000 for tuition and other fees. However, there are income restrictions as the deduction begins to phase out when adjusted gross income is $80,000 or greater ($160,000 if married filing joint). Unfortunately, you also cannot claim this deduction if you are claiming one of the educational credits.
What if I’m a high income earner?
You may not be able to claim the tax credits but your child certainly could if they had some earned income (i.e. summer jobs, investment income) during the year. You’ll need to withdraw the dependency exemption you normally claim for you child which is $3,700 for 2011 but that means they will be able to claim the tax credit. However, only move forward with this option if the tax credit your child is eligible for yields a greater tax benefit than the dependency exemption.
529 Savings Plans
A 529 savings plan is a tax-free college savings account sponsored by a particular state or groups of states that is used strictly for college expenses. You can now use money from your 529 savings plan to purchase computers and other technology related goods for your college education. There’s also usually a nice state tax deduction for contributing to a 529 savings plan. For New York State sponsored plans, if your status is married filing jointly, you could deduct up to $10K of your contribution – married filing separate would be up to $5K for the year. The highest income tax rate for New York State is 6.85% – if you were able to deduct the full $10K you’d be saving $685 on your state income tax return. Rules vary by state, so check with your state for more details.
More Tax Questions? Browse Answers or get tax credit questions online.
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