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2012 CCH Whole Ball of Tax
Students Looking for Education Tax Breaks Still Benefit from Prior Extensions: CCH Examines Available Deductions, Exclusions, Benefits
(RIVERWOODS, ILL., January 2012) – While 2011 ended without a flurry of education-related tax changes, students hoping to lower costs to attend school may still be covered by previous extensions of tax breaks by Congress. CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com), up dates tax breaks students may want to look into when filing income taxes.
In 2010, the American Opportunity Tax Credit (AOTC) was given a two-year extension that applies to the current tax season. Higher education tuition and teachers’ classroom expenses were also extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act).
“Students and their parents should see if they can take advantage of the tax benefits provided by the 2010 Tax Relief Act,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. “People still need to educate themselves on the options and make sure they’re taking advantage of the resources that will best help them.”
Education Credit Trio Now a Duo
The Hope Credit, which was enhanced and modified in early 2009 to create the AOTC, and the Lifetime Learning Credit can offset the costs of higher education. Claiming one precludes a taxpayer from claiming the other in the same tax year for the same student.
- The American Opportunity Tax Credit. This credit, an enhancement and modification of the Hope Credit, was established under the American Recovery and Reinvestment Act of 2009 (ARRA) and made available for 2009 and 2010. Under the 2010 Tax Relief Act, this credit has been extended an additional two years through 2012. It provides a maximum $2,500 credit per student per year for the first four years of post-secondary education tuition and expenses, with expenses more broadly defined to include required course material. It is available to taxpayers in full until their modified adjusted gross income (AGI) reaches $80,000 for single filers ($160,000 for joint filers) when the amount will start phasing out. The credit is completely phased out at $90,000 for single filers ($180,000 for joint returns). Up to 40 percent of the credit is refundable; as a result, someone who owes no tax could receive up to $1,000 of the credit for each eligible student as cash back ($2,500 x 40 percent).
- The Lifetime Learning Credit . This credit provides a maximum $2,000 credit per tax return regardless of the number of college students and applies if a student is enrolled in one or more courses at a qualified educational institution. It is available to taxpayers with modified 2010 AGI of $50,000 phasing out completely at $60,000 for single filers, and $100,000 phasing out completely at $120,000 for joint returns.
“In comparison to the regular Hope Credit and the Lifetime Learning Credit, the AOTC offers a larger credit with a refundable component and is available to taxpayers with a higher income for each of their college students in any of the first four years of college,” added Roth. “The Hope Credit was more limiting in that it was available only for the first two years of post-secondary education and the Lifetime Learning Credit is more restrictive in that it is available only per return, not per student.”
When a Larger Deduction Is Worth Less Than a Smaller Credit
Taxpayers claiming either of the higher education tax credits are not allowed to also claim the above-the-line deduction (also known as an adjustment to gross income deduction) for higher education tuition in the same year for the same student.
The higher education deduction also was extended by the 2010 Tax Relief Act through 2011. It is a deduction of up to $4,000 if a taxpayer’s modified AGI is not greater than $65,000 for a single filer ($130,000 for joint filers); a deduction of up to $2,000 is available for taxpayers with modified AGI up to $80,000 for a single filer ($160,000 for joint filers).
While it may appear that a $4,000 deduction would be more valuable than a $2,500 credit, a credit reduces a person’s tax liability dollar for dollar, whereas a deduction reduces taxes based on their tax bracket. As a result, a person in the 25-percent tax bracket would reduce their taxes by $1,000 through a $4,000 deduction, whereas a person taking a $2,500 credit would reduce their taxes by a full $2,500.
In addition to the higher education tuition deduction, other above-the-line deductions extended through 2011 as part of the Tax Relief Act include the student loan interest deduction (up to $2,500) and the teacher’s classroom expense deduction (up to $250).
The 2010 Tax Relief Act also extends the educational assistance exclusion through 2012, allowing employees to exclude up to $5,250 in employer-provided education assistance annually from income and employment taxes. Additionally, taxpayers can make a tax-free contribution of up to $2,000 to a Coverdell Educational Savings Account (Coverdell ESA).
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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