Education Deductions, Credits and Exclusions
By Kenneth H. Bridges, CPA, PFS March 2012
The Internal Revenue Code provides a variety of tax benefits for higher education expenses. Unfortunately, most of these are phased out for higher income taxpayers, making them unavailable for most of our clients. However, whenever we are preparing returns for our clients and their college-aged children, we consider which of these potential benefits may apply, and which is most advantageous when more than one may be available.
Tuition and fees deduction – For singles with income of up to $80,000 and married couples with income up to $160,000, a deduction of up to $4,000 per year may be taken for tuition and fees. This deduction expired at the end of 2011, but may be extended.
Deduction of student loan interest – Singles with income of up to $75,000 and married couples with income up to $150,000 can deduct up to $2,500 per year of student loan interest.
American opportunity tax credit – For singles with income of up to $90,000 and married couples with income up to $180,000, a tax credit of up to $2,500 per student is available for each of their first 4 years of college.
Lifetime learning credit – For singles with income of up to $61,000 and married couples with income up to $122,000, a tax credit of up to $2,000 per year is available. Unlike the American opportunity tax credit, this credit is not limited to the first 4 years of college. However, this credit is limited to $2,000 for the family, regardless of the number of students in the family.
Exclusion for qualified scholarships – Amounts received from a qualified scholarship are excluded from the recipient’s taxable income. There is no income limitation on this benefit.
Section 529 plans – Earnings on amounts contributed to a state-sponsored section 529 plan (qualified tuition plan) are excluded from taxable income, so long as amounts from the plan are expended only for qualifying higher education expenses. There is no income limitation on this benefit. However, contributions to 529 plans can potentially be subject to gift tax (subject to annual gift tax exclusions), so careful planning is necessary in this regard.
Coverdell education saving accounts – Singles with income of up to $110,000 and married couples with income up to $220,000 can make annual contributions of up to $2,000 per year per beneficiary to Coverdell education savings accounts. The contribution is not tax deductible, but the earnings on the account escape taxation, so long as used for education expenses.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.