Wading through IRS tax codes to figure out how education expenses may reduce your tax liability, and maybe boost your tax refund, can be a baffling exercise for even the most brilliant students. Dumping a pile of paperwork on the desk of your neighborhood tax preparer may seem to be the best route to go, but it is good idea to familiarize yourself with the credits and deductions available to students and parents who had education expenses in 2012. At the very least, you will want to know what paperwork you need to dump on that tax preparer’s desk.
The documents you will need:
By early February, you should have received in the mail a Form 1098-T Tuition Statement from your college. This is an informational statement, it does not need to be attached to your tax return, but the information is necessary for taking advantage of the credits and deductions allowed for education expenses. Most colleges also provide this information online through a student portal. Colleges send a duplicate copy to the Internal Revenue Service, so the IRS will be comparing figures.
If you have begun repayment of student loans, you should expect a Student Loan Interest Statement, Form 1098-E, from the institution that is servicing your loans. This also is an informational form that will be sent to the IRS.
In addition to these two forms, you will need receipts for books, supplies and equipment you were required to purchase for your course of study. This can include a computer purchase if a computer is required for enrollment or attendance at your college.
Available credits – a credit is applied against the amount of tax you owe. Some credits are non-refundable, meaning you do not get a refund of the amount of credit that exceeds the tax you owe; it can only, at most, eliminate your tax liability. Some credits are refundable. After wiping out any tax you may owe on income, the excess credit will come to you as a tax refund.
This credit was created under the American Recovery and Reinvestment Act of 2009, also known as the stimulus. It expanded the existing Hope Scholarship Credit to give a tax credit for four years of undergraduate study of up to $2,500 a year.
Who qualifies?
Students who are not listed as a dependent on another’s tax return or parents that paid education expenses for a dependent or spouse may use this credit. The student must be enrolled at least half time in an undergraduate program leading to a degree. This credit, combined with any Hope Credit a student took in the past, may only be used for four tax years per student.
To be eligible for the full credit, a single taxpayer’s modified gross income must be $80,000 or less — $160,000 for couples filing jointly. It is not available for married filing separately filers. Students with a felony drug conviction are ineligible.
What expenses are included?
This is the most generous of the education tax credits. The cost of tuition, mandatory fees, textbooks, supplies and equipment may be used to calculate this credit. Room and board, transportation and medical expenses are not included. Amounts covered by grants or scholarships, money that does not have to be repaid, are not included. You will find this amount in box five of the 1098-T form. Expenses paid for with a student loan are included, even though repayment is down the road.
How much is the credit?
The credit is 100 percent of the first $2,000 of education expenses, and 25 percent of the next $2,000, for a maximum credit of $2,500. Of this amount, up to $1,000 is refundable.
The Lifetime Learning Credit
This is a nonrefundable credit of up to $2,000. Unlike the American Opportunity Credit, which may only be used up to four tax years, is not limited in the number of years it can be taken.
Who qualifies?
Anyone who paid tuition and fees for themselves, spouse or dependent children may take this credit. The student does not need to be pursuing a degree, those who enrolled in one or more post-secondary classes or a training course to improve job skills qualify. The maximum modified gross income allowed for this credit is $122,000 for married filing jointly, $61,000 for single filers, head of household or qualifying widow(er) filing statuses. A felony drug conviction does not disqualify students for this credit.
What expenses are included?
Tuition and mandatory fees may be used in calculating this credit. Only books, supplies and equipment required by the program, and purchased from the college, are included as qualified expenses.
How much is the credit?
The maximum credit is $2,000 per tax return.
Taxpayers may choose the American Opportunity Credit or the Lifetime Leaning Credit but not both. These credits are calculated on Form 8863. For future planning, keep in mind that the Fiscal Cliff deal, passed by Congress on Jan. 2, included a five-year extension of the American Opportunity Credit, which was set to expire at the end of 2012.
What you need to know about education expense deductions for 2012 tax returns
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