Certified Public Accountants

EDUCATION CREDITS AND DEDUCTIONS

TAXING TIMES, October 2015 Edition

By Rick Torkelson, CPA and principal of Torkelson & Associates, LLP in Petaluma, CA

Kids are back to school, colleges are in full session and this would be a good time to talk about the tax perks of college expense.

AMERICAN OPPORTUNITY CREDIT (“HOPE CREDIT”)

“Credits” are better than “deductions” – a $1,000 credit saves you $1,000 while a $1,000 deduction saves you $250 if you’re in a 25% tax bracket. This credit applies to the first four years of undergraduate education when enrolled on at least a half-time basis in a program leading to a degree, credential, or certificate. The credit is equal to the first $2,000 of tuition, fees, and course materials required plus 25% of the next $2,000. This develops a maximum credit of $2,500 against your taxes and if you have no income tax liability, 40% (up to $1,000) is refundable.

Like many things in the tax code, higher incomes will wipe out the credit. If filing a joint return, the credit begins to phase out with gross income over $160,000 and fully phases out at $180,000 (half these amounts if single).

This credit is currently due to expire after 2017 although Congress has extended it often.

LIFETIME LEARNING CREDIT

This credit is not refundable – you must have tax to use it. The credit is equal 20% of the first $10,000 of tuition & fees (not course materials). This develops a maximum credit of $2,000 against your tax liability.

Unlike the American Opportunity Credit, this credit applies to any tuition or fee after high school – even you take one class and already have a college degree.

This credit also phases out – If filing a joint return, the credit begins to phase out with gross income over $108,000 and fully phases out at $128,000 (half these amounts if single). These phase out amounts are inflation-adjusted and will creep up each year.

This credit is also due to expire after 2017.

QUALIFIED TUITION & RELATED EXPENSE DEDUCTION

This deduction expired after 2014 – just like after 2013, but has been reinstated late every year. I wouldn’t be surprised for it to be reinstated again this year.

The deduction (not credit) is deducted from gross income (even if you do not itemize your deductions) and is equal to your first $4,000 or $2,000 (depending on your income) of tuition and fees required for enrollment. Until your gross income passes $130,000 (65,000 if single), you can deduct up to $4,000. Higher incomes can deduct up to $2,000 until gross income passes $160,000 (80,000 if single).

Kind of an oddity in the tax law – You can get a $2,000 deduction if your joint gross income is $160,000 but if it is $1 higher, you get nothing.

STUDENT LOAN INTEREST DEDUCTION

Interest on student loans might be deductible, but there are restrictions that in practice, often restrict the deduction. The good news is that you can deduct student interest ‘above the line’ – you don’t have to itemize your deductions to benefit by the deduction. The deduction is limited to a maximum of $2,500 (saving the average taxpayer about $800) and the deduction phases out with gross income over $80,000 for single taxpayers and $160,000 for married taxpayers. The loan also has to be for you, your spouse, or your dependent and the time the money was borrowed (you can’t pay your grandchild’s student loan and get a deduction).

Reminders

No estimates are due in November but it you’ve missed any of your estimates up to here, you can make one now. It’ll mitigate penalties and reduce that bill in April.

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