Financing a college education in the 21st century is no small feat. According to the College Board, the average cost of tuition and fees at a four-year private college for the 2009-2010 academic year was $26,273 and $7,020 for a four-year public university. Add several thousands more for room, board, books and supplies.
Fortunately, students, parents and graduates can get some of that money back on their 2010 federal tax return.
The American Opportunity, Hope and Lifetime Learning Credits are likely to yield the biggest tax savings. However, only one of these credits can be claimed per student per year according to Jessi Dolmage, spokeswoman for 2nd Story Software, makers of TaxACT. The American Opportunity and Hope Credits cannot both be claimed on the same return for any students in the same household. However, if the American Opportunity or Hope Credit is claimed for one student, the Lifetime Learning Credit can still be claimed on the same return for another student. Tax preparation software like TaxACT will select the best credit or deduction for you based on the information you've entered.
The following requirements apply to all three credits:
• Filing status on the return cannot be married filing separately.
• The student must be you, your spouse or dependent for whom you claim an exemption.
• A dependent cannot claim the credits if claimed on another person's (i.e. parents') return.
• If you do not claim the dependent exemption (even if entitled to the exemption), you cannot claim a credit based on that dependent's expenses.
• Claim credits on Form 8863 and file with your Federal 1040.
The American Opportunity Credit, scheduled to expire after 2010, is a modified version of the Hope Credit. It's worth up to $2,500 for tuition, fees and course materials per student for the first four years of postsecondary education. Even if you have zero tax liability, you can get up to 40 percent as a refund. It phases out at higher incomes and cannot be claimed with the Hope Credit on the same return.
The Hope Credit is worth up to $1,800 per student for the first two years of postsecondary education. Expenses may include tuition, fees and course-related materials (as long as the expense for those materials are required to be paid to the educational institution). It phases out at higher incomes, and a student or family claiming the Lifetime Learning Credit or Tuition and Fees Deduction for that same student is ineligible.
If you don't qualify for the American Opportunity or Hope Credits, consider the Lifetime Learning Credit. Up to 20 percent of the first $10,000 in higher education expenses per family can be claimed for an unlimited number of years. It phases out at higher incomes.
You may also qualify for the Tuition and Fees Deduction, given on a per-student, per-year basis. In other words, you cannot claim the deduction for Student A if you're claiming one of the above credits for that student, but you may still claim the deduction for Student B. You can deduct up to $4,000 for tuition and fees on Form 8917, regardless of whether you itemize or take the standard deduction. The deduction phases out at higher incomes, and cannot be claimed if you're married filing separately or claimed as a dependant on another return.
In addition to these credits or deductions, up to $2,500 in student loan interest paid each year for qualified higher education expenses can be deducted on your Federal 1040, even if you don't itemize. This deduction phases out at higher incomes, and is reduced by non-taxable distributions from a Coverdell Education Savings Account, savings bond interest used for education expenses and scholarships or veteran's education benefits. Married taxpayers filing separately and people claimed as a dependent on another return don't qualify.
2010 is also the last year costs paid or incurred for computer technology, equipment and Internet service for students living at home count as a qualified expense for Qualified Tuition Programs (aka 529 Savings Plans). Items must be used by the beneficiary and beneficiary's family during the years enrolled at an eligible institution.
Additional exceptions may apply to the aforementioned tax breaks, and other educational tax benefits exist for student loan cancellations and repayment assistance, Coverdell Education Savings Accounts, education savings bonds, employer-provided educational assistance and work-related education. Learn more about all education tax benefits in Publication 970 at www.irs.gov.
Come tax time in Spring 2011, TaxACT Free Federal Edition can walk you through all education credits and deductions. Answer simple questions and TaxACT will complete the forms for you. TaxACT also includes free tax help via e-mail and accuracy and maximum refund guarantees. Best of all, you can prepare, print and e-file your federal return free at www.taxact.com.