College Tax Savings: 2014 Edition Every little break helps

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With the start of school just around the corner, it is hard to ignore the high cost of funding a college education. Thankfully, there is some help within the tax code. Outlined here are three of the more popular ways to reduce your taxes in 2014 as a result of this educational expense burden.

Who Qualifies:

Typically you, your spouse, or a dependent who can be claimed as an exemption on your individual tax return

Qualified Expenses:

Tuition and fees, course-related books, supplies and equipment

Common Tax Benefits:

  1. American Opportunity Credit.
    • Amount of Credit: $2,500 per eligible student at an eligible institution ( 100% of initial $2,000 and 25% of the next $2,000 of eligible expenses)
    • Frequency: Available for the first four years of post-secondary education
    • Comments: In 2014, 40% of this credit is a “refundable” credit. This means you can receive up to $1,000 even if you owe no federal income taxes.
  2. Lifetime Learning Credit.
    • Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 in eligible expenses)
    • Frequency: No limit on number of years you can claim the credit
    • Comments: The income limits for this credit are much lower than for the American Opportunity Credit.
  3. Student loan Interest Deduction.
    • Amount of Deduction: Reduce up to $2,500 of your income subject to tax
    • Frequency: Per taxpayer per year.
    • Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions.

The One that Got Away? Tuition and Fees Deduction

There is also a Tuition and Fee deduction for up to $4,000 in eligible expenses that was available to taxpayers through 2013. Unfortunately, this educational benefit has not been extended into 2014. So if you have used this deduction in the past, it is time to review your other alternatives. But be prepared in case Congress extends this tax benefit once again.

Tips to Maximize your Tax Benefit

  • The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple, eligible students, the American Opportunity may be a better choice.
  • Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits.
  • You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits.
  • Gifts, bequests, or inheritances do not reduce your eligible expenses.
  • Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return.
  • Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts you could subject yourself to a 10% tax penalty.

Remember, like most tax provisions, these benefits are all subject to income limitations. To receive the maximum credits noted above your Modified Adjusted Gross Income must be below beginning phase-out amounts. When you reach the maximum phase-out amount you are no longer eligible for the tax benefit. For 2014 they are:

Educational Benefits:2014 Modified Adjusted Gross Income Phase-outs
Filing status American Opportunity Credit Lifetime Learning Credit Student Loan Interest
Single
$80,000 90,000
$54,000 64,000
$65,000 80,000
Married Filing Joint
160,000 180,000
108,000 128,000
130,000 160,000