Fall Is Coming! Time to Plan for College

Summer has finally arrived in New England. We now have daily highs approaching 90 and the pools and lakes are filled with kids and parents looking for relief. Labor Day starts the school season again so parents have many days left to plan summer activities. Calls to the Midwest about vacations are answered with the sobering fact that there school is just weeks away. That means that education costs are on most parents' minds once again.

Today, and because of the calendar, we look at some tax laws that greatly effect the planning calculus for one of life's major expenses: the cost of education.Here, and especially for the next two years, Congress has provided an array of choices. So today we consider the following three: The new American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction.With these three tax benefits it is mandatory that you keep in mind what is considered an eligible expense, income limitations and how the credits and deductions can be combined. Let's take a look.

The American Opportunity Tax Credit

A new tax credit for 2009 and 2010: the American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. What does that mean? Even if you have ZERO tax liability you can get money back from Uncle Sam. Now here's the catch. The credit is only available for tax years 2009 and 2010. After that it disappears, unless Congress decides to extend it.

In contrast to the Lifetime Learning Credit or the Hope credit, the definition of qualifying educational expenses is broader under the AOTC. In addition to tuition and required school fees, students can also include the cost of course materials such as books, lab supplies, software and other class materials. (Note: Best to keep all receipts as supporting documentation.)

Lifetime Learning Tax Credit


The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Taking as little as one class qualifies.

All accredited colleges and universities are eligible educational institutions. Additionally, vocational schools and other post-secondary institutions are also eligible.

Qualifying expenses include amounts paid for tuition and any required fees (such as registration and student body fees). Qualifying expenses do not include any of the following: books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.

In calculating the credit, you must reduce your qualifying expenses when figuring your tax credit by the amount of financial assistance received from grants, scholarships, or reimbursements from your employer. You do not need to reduce your qualifying expenses, however, if you paid for college tuition using borrowed funds, including student loans, or by using gifts from family members.


If your son or daughter is going to college, and you claim him or her as a dependent, then you can claim the education credits on your tax return. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return.


As previously warned, you must pay close attention to income limitations. The Lifetime Learning Credit is limited over a phase-out range. If your adjusted gross income is below the phase-out, your credits are not reduced. If your income is in the middle of the phase-out range, your credits will be reduced. If your income exceeds the phase-out range, you are not eligible to claim any education tax credits.

* $48,000 to $58,000 : Single, Head of Household, or Qualifying Widow
* $96,000 to $116,000 : Married Filing Jointly

Compare this with the income limitations on the tuition and fees tax deduction. The full $4,000 deduction is allowed if you earn less than $65,000 (single, head of household, qualifying widow) or less than $130,000 (married filing jointly). The deduction is limited to $2,000 if your income is between $65,000 and $80,000 (unmarried taxpayers) or is between $130,000 and $160,000 (married filing jointly).

What about Married Filing Separately? No education tax break of any type. Separate filers are not eligible for the Hope Credit, Lifetime Learning Credit, or the tuition and fees deduction.

Tuition and Fees Tax Deduction

2009 is scheduled to be the last year that taxpayers can take this deduction, which is taken directly on your Form 1040.


The maximum amount of the tuition and fees deduction you can claim is $4,000 per year. The deduction is further limited by income ranges:
$4,000 max for income up to $65,000 ($130,000 for joint filers)
$2,000 max for income over $65,000 up to $80,000 ($160,000 for joint filers)
no deduction for income over $80,000 ($160,000 for joint filers).

(Note: Measured using adjusted gross income modified to add back certain types of foreign income that are excluded from US income taxes.)

What qualifies?

* Tuition
* Fees required as a condition for enrollment or attendance

Books, student health fees, and other school related costs are generally do not count as qualifying expenses for the tuition deduction. Schools report qualifying expenses to you and to the IRS using Form 1098-T.

The deduction is available for any person who paid tuition and other required fees for attending college, university, or other post-secondary school. The deduction is available for parents whose dependents attend college, but only if the parents claim the student as a dependent. Taking even one class qualifies. As with the Lifetime Learning Credit, the deduction is not available for married couples who file separate tax returns.

As can be expected, a careful consideration of the interplay between these credits and deductions provides the largest tax benefits. Generally, see IRS Publication 970. For how they will work for you in your individual situation, consult your tax advisor or trusted financial professional.