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 That is unfortunate, because there is evidence that many families
are missing out on the available credits and deductions, leaving
hundreds if not thousands of dollars on the table.
Only 42 percent of those polled in a Sallie Mae survey, "How America
Pays for College 2014," said they used available tax breaks to help
reduce college costs. The student lender questions 800 undergraduate
college students and 800 parents of undergraduates for the annual
survey.
Some high-earning parents may not think they're eligible because of
income limits or deductions, but in many cases their college
students could be taking advantage of the breaks, said Lisa
Greene-Lewis, a CPA and tax expert for TurboTax.
At the other end of the income scale, families that earn too little
to owe income taxes could still get up to $1,000 back because one of
the credits is refundable. Yet only 36 percent of those who make
less than $35,000 said they took advantage of tax breaks.
Even those who know the benefits exist may be defeated by their
sheer complexity. Various tax breaks have different income limits,
eligibility requirements and qualifying expenses. Three of them -
the American Opportunity Credit, the Lifetime Learning Credit and
the tuition and fees deduction - are mutually exclusive, which means
you can only take one per year. Plus, you can't use any of them for
expenses paid with a tax-free 529 plan withdrawal.
"You look at this and your head's swimming," said Sallie Mae
spokesman Rick Castellano. "If you're not a tax professional, you
might miss out."
Here's what you need to know:
The American Opportunity Credit is typically the most valuable
credit, if you qualify. It reduces taxes dollar-for-dollar for the
first $2,000 of college expenses and then by 25 percent of the next
$2,000, for a total of $2,500 per student. Furthermore, 40 percent
of the credit is refundable, which means you can get up to $1,000
back even if you don't have any taxes to offset.
To qualify, the student must attend college at least half-time, and
the credit cannot be claimed for more than four tax years. Any year
when the old Hope Credit was claimed counts toward that limit.
The credit phases out between modified gross incomes of $80,000 to
$90,000 for singles, and $160,000 to $180,000 for married couples
filing jointly.
If parents cannot take the credit, their children typically can if
they have taxable income of their own, Greene-Lewis said. The
parents would not then be able to take the dependency exemption of
$3,950 for the child, but the value of the credit is often greater
than the tax reduction from the exemption, she said.
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The Lifetime Learning Credit isn't as valuable but in some ways it's
more flexible. It can be taken even for a one-off course, such as
one to build job skills. It offsets 20 percent of tuition and
certain other required expenses up to $2,000 per tax return. In
2014, the credit phases out for modified adjusted gross incomes
between $54,000 and $64,000 for singles, and $108,000 and $128,000
for married couples filing jointly.
OTHER DEDUCTIONS
If you can't take either of these credits, you may still be able to
use the tuition and fees deduction. This reduces taxable income by a
maximum of $4,000 for incomes up to $65,000 for single filers and
$130,000 for joint filers, and by up to $2,000 for incomes over
$65,000 for singles and $130,000 for joint filers. There's no
deduction for incomes over $80,000 for singles and $160,000 for
joint filers.
Then there's the deduction for student loan interest, which allows a
deduction of up to $2,500. The deduction phases out between $65,000
and $80,000 for singles and between $130,000 and $160,000 for joint
filers. You're allowed to take this deduction even if you're
claiming one of the other tax breaks.
There are other nuances you need to know, such as which expenses
qualify for which credits. For example, the cost of required books
is allowed for the Lifetime Learning Credit only if the money was
paid directly to the school, Greene-Lewis said.
With the American Opportunity Credit, the cost of books is eligible
regardless of where they're bought. Supplies aren't covered at all
by the deduction for tuition and fees, which covers just that.
For all the gory details, see IRS Publication 970. You also can use
TurboTax's education calculator, which you'll find at https://turbotax.intuit.com/tax-tools/calculators/education/.
(The author is a Reuters columnist. The opinions expressed are her
own.)
(Editing by Beth Pinsker and Leslie Adler)
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