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Don’t test fate on education tax credits

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in Small Business Tax,Small Business Tax Deduction Strategies

Unless something dramatic happens soon, a valuable tax credit for parents of college students, the American Opportunity Tax Credit (AOTC), will be wiped off the books.

Strategy: Pay tuition bills on time. Generally, tuition for the fall 2012 semester is due before Sept. 1, 2012, while the deadline for the spring 2013 semester is Dec. 31, 2012. As long as the tuition is paid in 2012, you can claim a credit this year.

Due to the uncertain fate of this tax break, it’s better to be safe than sorry.

Here’s the whole story: The AOTC is the souped-up version of the former Hope Scholar­­ship credit. Currently, it equals the sum of 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000, for a total maximum credit of $2,500 per eligible student. Also, the AOTC now applies to the first four years of a student’s post-secondary education. (It was previously limited to two years.)

The AOTC phases out at specified modified adjusted gross income (MAGI) levels. Saving grace: The enhanced phaseout levels for the AOTC are relatively high. For 2012, the AOTC phases out between $160,000 and $180,000 of MAGI for joint filers ($80,000 and $90,000 for single filers).

Finally, the AOTC now allows you to receive up to 40% of the value of the AOTC as a refund (up to a $1,000 maximum), even if you have zero tax liability.

Tip: If your child has unearned income subject to the “kiddie tax,” none of the credit is refundable.

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