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The satisfaction of helping your granddaughter attend college has its own rewards. But with rising college costs, a few extra dollars at tax time can be a big help in covering the expenses. The federal government offers several income tax breaks for those who pay college tuition costs. Paying your granddaughter's college costs qualifies you for these breaks, but only if she is considered your dependent for tax purposes.
Generally to be your dependent, your granddaughter cannot claim her own exemption and cannot be claimed as a dependent by her parents. She also cannot provide more than half of her own support, and she must live with you for more than half the year if she is a full-time student and under 24, although if she is attending college she can still be considered living with you if she uses your address as her permanent residence. If either of her parents could also claim her as a dependent, they can elect to let you claim her as long as your income is higher than either of theirs. If she is married, she cannot file a joint tax return except to claim withheld income taxes.
Tax Benefits Overview
The main education tax benefits are the tuition and fees deduction, the American Opportunity credit and the lifetime learning credit. These programs offer deductions or tax credits based on the amount you pay for a dependent's tuition, fees and other qualified costs such as textbooks and classroom materials. You are allowed to claim only one of these benefits for each student.
The tuition and fees deduction allows you to deduct from your taxable income the amount of qualified costs you paid for a dependent. To claim the deduction you, or your spouse if filing jointly, are required to have paid the costs directly to the college. You cannot claim any payments made by your granddaughter, even though she may be your dependent. You can claim up to $4,000 in deductions if your income is not more than $65,000, or $130,000 if filing a joint return. Your maximum deduction falls to $2,000 if your income is above those amounts, but not more than $80,000, or $160,000 if filing jointly.
American Opportunity Credit
If your dependent granddaughter is still in her first four years of college, you will probably get the greatest tax benefit by claiming the American Opportunity credit. A credit differs from a deduction in that a credit reduces your tax bill dollar for dollar instead of just reducing your taxable income. The amount of the American Opportunity credit depends on the amount of qualified costs that you or anyone else pays on behalf of your dependent. Your income must be under $80,000, or $160,00 if filing jointly, to claim the maximum credit of $2,500. You can still claim a phased-out amount of the credit until your income reaches $90,000, or $180,000 if filing jointly.
Lifetime Learning Credit
If your granddaughter is past her first four years of college, you can still claim the lifetime learning credit. This credit is similar to the American Opportunity credit, except you can get a maximum credit of only $2,000. To qualify, your income must be under $61,000, or $122,000 if filing a joint return.
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