College planning and taxes

Most Americans would say that a college education is priceless, but they may not have looked into the most recent tuition and student loan debt figures. The cost of attending a four-year institution has skyrocketed in recent years, as university endowments, scholarships and grant funding have taken a heavy blow due to the economic collapse. As colleges have seen sizable donations shrink, they have been forced to both slash university scholarships while, at the same time, raising the costs of tuition. As a result, more young adults are graduating college with significant debt.

Lowering the price tag of a college education can be accomplished by applying for scholarships, grants and work-study programs, but individuals also have another money saver at their disposal: tax credits. The recent tax laws passed, which are set to go into effect in January, has extended and modified existing education credits that can benefit parents or students greatly.

For example, the new American Opportunity Tax Credit, which modifies the existing Hope Credit, will be available for the next two years and allow taxpayers to deduct qualified education expenses up to $2,500 per eligible student. Taxpayers may receive the credit of up to 100 percent of the first $2,000 in expenses, fees and tuition, and 25 percent of the next $2,000 education expenses. Unlike the Hope Credit, which could only be claimed for expenses during the first two years of a student's college education, can be claimed for the full four years. Qualified education expenses include tuition and related expenses. Additionally, the definition of "qualified education expenses" has been expanded to cover course materials, meaning taxpayers may include the costs of books, supplies and equipment needed for a class. The full credit will be available to single taxpayers whose adjusted gross income is $80,000 or less and married couples filing jointly, whose AGI is $160,000 or less.

The Lifetime Learning Credit may also benefit graduate students or those returning to school. The credit covers qualified tuition and related expenses for the taxpayer, his or her spouse and eligible dependents. Unlike the Hope or American Opportunity Credit, the Lifetime Learning Credit is available to graduate students and covers up to 20 percent of out-of-pocket expenses up to $10,000, for a maximum amount of $2,000.

The provision that allows taxpayers to itemize deductions for student loans has also been extended until December 31, 2012, under the new law. Coverdell Education Savings Accounts are also included in the two-year extension.

__________________________________________________________________________________________________________________
Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.