New tax breaks available on college tuition costs
In June I attended a college graduation party. I was chatting with the graduate and he told me that only 18 percent of his graduating class had full time jobs. An ABC News survey, pretty much confirmed this statistic. Although we are in the middle of a recession, one has to wonder if the college system in the US is still based on a 20th century model. I would think that after investing upwards of $200,000, college graduates would have been taught some skills that are more valued by employers. Success in the 21st century will still go to knowledge workers, but what skills are the colleges teaching if 80 percent of the students can not find jobs? This statistic will obviously change as the economy improves, but it just seems that alternatives to quality education can come at a much better value, i.e. internet, books, lectures on DVD, audio programs etc.
The costs of college education are compounded, as much of the cost must be paid in after tax dollars. (You will probably need to earn in the neighborhood of $325,000 in wages to pay $200,000 in college costs.) The federal government has provided some relief in recent years and new rules in 2009 are the most generous yet. There are now three different options, one of which is brand new for this year. The following gives a brief outline of each:
American opportunity tax credit: This new tax credit was included in the American Recovery and Reinvestment Act of 2009 and has effectively replaced the Hope scholarship tax credit. This credit is only available for expenses incurred in the first four years of post high school education. Under this law, taxpayers can receive up to a $2,500 tax credit for each student in college. Thus, if you have three students in college, you can receive up to $7,500 in a single year. The tax credit is calculated as dollar for dollar on the first $2,000 of higher education costs incurred, then is calculated as 25 cents on the dollar for the next $2,000 of higher education costs incurred. Once the taxpayer spends $4,000 for higher education costs, he / she qualifies for the maximum tax credit available of $2,500. This tax credit phases out for single taxpayers with modified adjusted gross income of between $80,000 and $90,000. For married couples the phase out range is between $160,000 and $180,000.
Lifetime learning credit: This credit is available for costs incurred for any year of higher education. The Lifetime learning credit is 20 cents on the dollar of higher education costs spent, up to a maximum credit of $2,000. Consequently, you need to spend at least $10,000 for higher related expenses to obtain the maximum credit of $2,000. This credit is not available per student, but per taxpayer. As such, if you have three students in college at once, you can only receive the maximum tax credit of $2,000. This tax credit phases out for single taxpayers with modified adjusted gross income of between $50,000 and $60,000. For married couples the phase out range is between $100,000 and $120,000.
Tuition and fees deduction: Taxpayers can also choose to use the tuition and fees deduction as opposed to the aforementioned tax credits. A taxpayer can deduct up to $4,000 of higher education costs. This deduction is not available to single tax payers with a modified adjusted gross income of greater than $65,000 or married couples with a modified adjusted gross income over $130,000. Expenses paid for with earnings from a Section 529 plan are not considered qualifying expenses.
For most taxpayers, the American opportunity tax credit will be the most beneficial. However, if the student is obtaining an advanced degree, then the Lifetime learning credit will be optimal. If the taxpayer does not qualify for the Lifetime learning credit due to income limitations, he / she should then look to gain tax relief from the Tuition and fees deduction.
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