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Get ‘extra credit’ for your kids in college

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in Centerpiece,Small Business Tax,Small Business Tax Deduction Strategies

The price tag on a college diploma keeps going up, but at least you might be able to salvage some tax benefits if you’re paying the tab.

Case in point: If your child is attending college this fall, you may have a chance to claim an enhanced tax break for higher education expenses.

Strategy: Maximize benefits for the American Opportunity Tax Credit (AOTC). This enhanced credit, which was extended by the American Taxpayer Relief Act of 2012 (ATRA), is now available through 2017.

If it increases your credit for 2013, you might pay the tuition bill for the second semester— typically due in January of  2014—before the end of this year.

Here’s the whole story: The tax law provides two tax credits for higher education expenses. For 2013, the maximum AOTC is $2,500 and is available for up to four years of undergraduate study. (Previously, the maximum credit was only $1,800 and the AOTC was limited to the first two years of study.) In addition, 40% of the enhanced credit is refundable.

In contrast, the maximum allowed for the other tax credit for higher education, the Lifetime Learning Credit (LLC), is $2,000. The LLC may be claimed for only one student in any college year. There’s no such restriction on the AOTC.

Both credits, however, phase out for upper-income taxpayers at slightly different levels.

The phaseout for the AOTC oc­curs between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers; $160,000 and $180,000 of MAGI for joint filers. In 2013, the phaseout for the LLC occurs between $53,000 and $63,000 of MAGI for single filers: $107,000 and $127,000 for joint filers. No credit is allowed above the upper thresholds.

The alternative tuition deduction, which is claimed above the line, is $4,000 if your adjusted gross income (AGI) is below $65,000 for single filers; $130,000 of AGI for joint filers. It is reduced to $2,000 for an AGI up to $80,000 for single filers; $160,000 for joint filers. It is zero above the upper thresholds. So some high wage-earners have a better shot at the AOTC.        

Tip: Unlike the AOTC, the tuition deduction is scheduled to expire after 2013.

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