Accounting memo addressing key business questions

Education Credits and Deductions

Dear Paul and Karen Smith;

There are a few education credits, listed in Publication 970, that can be considered based on your modified adjusted gross income (MAGI). The American Opportunity Credit can provide up to $2,500 for each qualified student. It has a MAGI of $180,000 for married filing jointly. The Lifetime Learning Credit can provide up to $2,000 per return as long as you don't have more than $122,000 in MAGI. There is also the Hope Credit that can provide up to $2,500. For the American Opportunity Credit and the Hope credit, they are available for the first 4 years of postsecondary education for each student. The Lifetime Learning Credit is available for an unlimited number of years. And, this also depends on if the children are enrolled at least half time each year. These credits cannot be taken together for the same qualified education expenses.

Qualified education expenses include tuition fees, required enrollment fees, and course materials. Course materials must be required for all students who take the course and can be added regardless of whether the materials are bought from the school or elsewhere. If part of the expenses were paid with loans, they are treated as paid out of pocket and added to the qualified education expense total.

These credits can be only be claimed by the one that claims the exemption for each student. For example, if you claim the exemption, you can claim the credit, where the children will not be allowed to, regardless of their own income. Where Sandra had income of her own more than $5,800, according to Publication 929, she would be required to file her own tax return without claiming herself if you have claimed the exemption to take the education credits. And, unless she can prove she paid over 50% of her own support, she would not be allowed to claim the exemption.

As far as the tuition and required fees paid by Paul's parents for Stan's 2011-2012 school year, they cannot be claimed. Stan would have to be a dependent on their tax return in order for them to be able to claim a deduction for those expenses. And, because you did not pay them, you cannot add them into the expenses you paid in order for them to be claimed.

If you don't qualify for the education credits, there is the Tuition and Fees Deduction that can provide a maximum benefit up to $4,000. It has a maximum MAGI of $160,000 for married filing a joint return. And, for the school loan on Stan, there is a Student Loan Interest Deduction where the interest on the payments can be deducted every year for the life of the loan starting with the 2012 tax year when the loan was obtained. There is a phase out on this deduction that starts at $120,000 MAGI. The limit on the MAGI is set at $150,000. As long as Stan is your dependent and you pay the payments on the school loan, you can claim the Student Loan Interest Deduction for all the years you make the payments.