Education tax benefits you should know about
By David Fulton, CPA
If
you are a taxpayer with higher education costs, you should
be aware of the many tax benefits that are available to you.
Generally, educational assistance such as scholarship,
fellowship, or employer-provided educational benefits are
excludable from income. For education costs not covered by
educational assistance, tax benefits include the Hope
scholarship credit (also known as the American Opportunity
credit for 2009 and 2010) and the lifetime learning credit.
Alternatively, you may have the option of deducting
qualified tuition and fees expenses "above the line." These
credits and deductions are coordinated with the exclusion
for distributions from education savings plans, such as,
Coverdell Savings Accounts and qualified tuition programs.
For taxpayers who take out a loan to pay for their
education, a deduction is available for the student loan
interest.
The amount of the
American Opportunity tax credit is computed as 100
percent of the first $2,000 of qualified tuition and
related expenses plus 25 percent of the next $2,000
of such expenses, for a total maximum credit of
$2,500. The lifetime learning credit is generally
available for 20 percent of education expenses up to
$10,000. For taxpayers who do not itemize, an
above-the-line higher education tuition deduction
can be claimed in 2009 for up to $4,000.
Each education
credit and the deduction have adjusted-gross-income
phase out limitations. In addition the education
credits are coordinated with the deduction and
Coverdell Savings Accounts and qualified tuition
programs so that taxpayers cannot realize duplicate
tax benefits for the same dollars of education
costs. Because of the variety of tax benefits and
the variations as to eligibility and the definition
of qualifying education expense, some or all of the
benefits may apply to you. Every taxpayer should
review their tax plan in order to take maximum
advantage of the tax savings for education.
For instance, a
taxpayer generally should elect the Hope scholarship
credit rather than the exclusion from income for
distributions from a Coverdell ESA. However, a
taxpayer may be better off electing the exclusion in
situations in which the student incurs relatively
lower tuition and fees and higher expenses of other
kinds (such as expenses that qualify for the
exclusion, but not for the credits). Also, because
the credits are phased out when a taxpayer's
modified adjusted gross income exceeds a specific
level, it may be more advantageous to forego the
exemption for a dependent student and have the
student claim the education credit on their own
return.
David
Fulton is a Certified Public Accountant that graduated and became a
CPA in the early 1980s. He earned a Master of Science in Taxation
degree. He has operated his own business, a CPA practice, for 22
years, located at 320 Spanish Street in Sutter Creek. You can reach
him at 209-267-0305.
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