The state of the economy has prompted people of all ages to return to school. Some are seeking out degrees to help them enter new career paths, others are hoping to bolster their existing experience and some are returning simply for the love of learning. While attending a higher institution has both intrinsic and extrinsic value, the price tag of an education can be unsettling. Millions of graduates are leaving school with tens of thousands in student loans and struggling to repay their debt. However, some may not realize that there are tax breaks available to help students afford their education.
For example, the American Opportunity Credit may cover up to $2,500 of qualifying undergraduate college expenses. When broken down, the credit equals 100 percent of the first $2,000 of qualified postsecondary education expenses and 25 percent of the next $2,000. It's important to note that the credit phases out for singles with modified adjusted gross incomes between $80,000 and $90,000. The benefit will also phase out for married joint filers with a MAGI between $160,000 and $180,000.
As with many tax breaks, there are certain rules that individuals must follow. To claim the credit, they have to be enrolled in an eligible institution, which typically refers to most accredited institutions that offer AA, B.A. and B.S. programs. In addition, the credit will only be applied to qualified expenses. Under current tax rules, these include tuition, mandatory enrollment fees, and course materials including books. However, it's important to note that other high-price items, such as room and board, do not fall under this allowance.
Individuals can claim the credit for themselves when they go back to school or for matriculating spouses and dependent children. Students must also attend at least half-time in order to qualify.
Lifetime learning credit also available
Individuals may also consider claiming the Lifetime Learning Credit, which may cover up to $2,000 in qualified expenses during a student's undergraduate and graduate years or if they return for job skills training. Similar to the American Opportunity Credit, students must attend an eligible institution and can only use the credit for qualifying expenses.
Phase out rules also apply to this credit. For singles, the phase out begins when their MAGI reaches between $53,000 and $63,000. These amounts increase to $107,000 and $127,000 for married couples who file joint returns. For assistance determining which credit best fits an individual's circumstances, potential students should consult with their tax preparer.
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