For parents and students trying to manage college bills and student loan payments, the federal government offers education-related tax benefits. The requirements for each are different, so here's what you need to know.
American Opportunity (Hope) credit
The American Opportunity credit (Hope credit) is a tax credit available for the first four years of a student's
undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2011 (it's calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and
parents must claim their child as a dependent on their tax return to take the credit. To be eligible for the credit, your income must fall below certain limits. In 2011, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. One nice feature of the American Opportunity credit is that it's calculated per student, not per tax return. So parents with two (or more) qualifying children in a given year can claim a separate credit for each child. The mechanics of claiming the credit are relatively easy.
Lifetime Learning credit
The Lifetime Learning credit is another education tax credit, but it has a broader reach than the American
Opportunity credit. As the name implies, the Lifetime Learning credit is available for college or graduate courses taken throughout your lifetime (the student can be you, your spouse, or your dependents), even if those courses are taken on a less than half-time basis and don't lead to a formal degree. However, this credit can't be taken in the same year as the American Opportunity credit on behalf of the same student. The Lifetime Learning credit is worth up to $2,000 in 2011 (it's calculated as 20% of the first $10,000 of qualified expenses). In 2011, a full credit is available to single filers with a MAGI below $51,000 and joint filers with a MAGI below $102,000.
Student loan interest deduction
The student loan interest deduction allows borrowers to deduct up to $2,500 worth of interest paid in 2011 on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However, the debt must have been incurred while the student was attending school on at least a half-time basis in a program leading to a degree, certificate, or other recognized educational credential. So loans obtained to take courses that do not lead to a degree or other educational credential are not eligible for this deduction. Your ability to take the student loan interest deduction depends on your income. For 2011, to take the full $2,500 deduction (assuming that much interest is paid during the year) single filers must have a MAGI of $60,000 or less and joint filers $120,000 or less. Also, to be eligible for the deduction, an individual must have the primary obligation to pay the loan and must pay the interest during the tax year.
Deduction for qualified higher education expenses
The deduction for qualified higher education expenses is available in 2011 (and was retroactively reinstated for 2010). It is worth up to $4,000 for out-of-pocket qualified higher education expenses that you pay during the year. Single filers with a modified gross income (MAGI) of $65,000 or less and joint filers with a MAGI of $130,000 or less can take the full $4,000 deduction. A $2,000 deduction is available for single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and $160,000. Parents can claim the deduction for more than one child in the sameyear, but the deduction can't be taken in the same tax year in which an American Opportunity credit or Lifetime Learning credit is taken for the same student.
Credits/Deductions in a Nutshell
|
American Opportunity (Hope) Credit |
$2,500 |
Single: $80,000 or less; Married $160,000 or less |
Tuition and fees, course materials |
|
Lifetime Learning Credit |
$2,000 |
Single:$51,000 or less; Married $102,000 or less |
Tuition and fees only |
|
Student Loan Interest Deduction |
$2,500 |
Single: $60,000 or less; Married $120,000 or less |
Tuition,fees,room,board,books,equipment |
|
Deduction qualified higher education expenses |
$4,000 |
Single: $65,000 or less;Married $130,000 or less |
Tuition and fees only |
Ossining resident Michael Salmon is a Senior Financial Advisor with Ameriprise Financial in Midtown Manhattan. Michael Specializes in Financial Planning,Investment Portfolio Management, Retirement Planning Strategies, Estate Planning Strategies,Saving for Education Michael is an active public speaker and financial columnist. You can reach Michael at (646) 964-9470 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
