If you help pay your child's college tuition, you may qualify for a tax break. To receive Internal Revenue Service deductions and credits for higher education expenses, you must claim the student as a dependent on your taxes. Your student must meet the IRS qualified-child guidelines, including age, income and residency restrictions. You must also provide more than half the child's support. Money you give to an independent child for tuition is not deductible.
The American Opportunity Credit
For 2012, the American Opportunity credit reimburses you up to 100 percent of the first $2,000 you spend on your dependent child's annual tuition and fees (excluding room and board costs), plus 25 percent of the next $2,000 you spend. The maximum credit is $2,500 a year per student. The American Opportunity credit is refundable, which means that once your tax liability reaches zero the remainder of the credit is applied toward your refund. If you do not owe taxes, you can receive up to $1,000 from the credit. When your child has completed four years of academic hours, you can no longer claim the credit. To qualify for the full credit, your modified adjusted gross income must be $80,000 or less for a single taxpayer and $160,000 or less for joint taxpayers. The credit is gradually reduced for single taxpayers with incomes between $80,000 and $90,000 and married taxpayers with incomes between $160,000 and $180,000. Single filers with an income above $90,000 and couples exceeding $180,000 cannot claim the credit. The American Opportunity credit is set to expire in 2013, unless Congress extends the credit.
Lifetime Learning Credit
The Lifetime Learning credit is less restrictive. You can claim the credit for your dependent child, regardless of the number of years he has completed. It is commonly used after you are no longer eligible to claim the American Opportunity credit. The nonrefundable credit and allows you to claim 20 percent of the first $10,000 you spend in higher education expenses, with a maximum of $2,000 per return. At the time of publication, the Lifetime Learning credit begins to phase out when the MAGI reaches $52,000 for a single taxpayer and $104,000 for joint taxpayers. The credit is eliminated when the income exceeds $62,000 for a single taxpayer and $124,000 for married taxpayers. At the time of publication, there is no expiration date set for the Lifetime Learning credit.
In most cases, you cannot withdrawal from a traditional IRA without facing the IRS 10 percent tax fee until you are 59 1/2. However, you are allowed to withdrawal penalty-free funds from the account to pay higher education expenses for your dependent child. You are required to report the disbursement from a traditional IRA as income and pay taxes on the amount. With a Roth IRA, there is no penalty for withdrawals made on the principal. You can withdrawal up to the amount you contributed without facing a penalty at any age, provided the account is established for at least five years. If you withdrawal more than the principal before 59 1/2, you are taxed on the interest and may even face the 10 percent penalty. However, when the disbursement is made to pay higher education expenses, the fee is waived.
If you do not qualify for the American Opportunity or Lifetime Learning credits, you can deduct tuition and related education expenses paid for your dependent child. At the time of publication, you can deduct up to $4,000 of college tuition expenses. You can even claim the deduction if you claim the standard deduction, rather than itemizing. To receive the full deduction, The MAGI must be below $65,000 for a single filer and below $130,000 for joint filers. No deduction is available for a single taxpayer with an AGI higher than $80,000 or $160,000 for joint taxpayers. The deduction covers tuition and enrollment fees. Books, student health fees, supplies and other related costs are not eligible for the deduction.
- IRS: American Opportunity Tax Credit - Questions and Answers
- Kiplinger: Tax Breaks for Education Expenses
- IRS: Topic 457 — Tuition and Fees Deduction
- CBIZ: IRS Releases Official 2012 Tax Rate Brackets, Standard Deductions, Other Inflation-Adjusted Figures
- Tax Policy Center: Extend the American Opportunity Tax Credit
- Cordasco & Company P.C: 2012 Individual Estimates Affected by Expiring Tax Provisions