It’s tax time and you’re thinking about all of the ways that you can save money on your both taxes for 2011 and looking forward to 2012. If you have a college student, you’re undoubtedly thinking that although the costs of college are high, there are plenty of ways to recoup that money from the IRS.
We’ve all heard that the best way to set yourself up for a comfortable future is to get a college education and the government believes that as well. They have numerous credits and deductions designed to get more people in to college regardless of their age.
There are two key areas where most of the college tax writeoffs reside. If you later have student loan interest, those writeoffs fall under a different set of tax codes but let’s look at the tax benefits you’ll receive for the more immediate expenses.
American Opportunity Credit
How would you like a $2,500 discount on your taxes? Any time you see the term “credit”, your eyes should widen because a credit is much better than a deduction providing you meet the eligibility requirements. In this case, you can receive a $2,500 credit if you spend at least $4,000 on college related expenses. This can include course related books, supplies and other equipment along with tuition costs. The credit will cover 100% of the first $2,000 and 25% of the second $2,000.
To receive it, you have to claim your child as a dependent and your income can be no more than $90,000 if you’re single or $180,000 if you’re married. If you earn more than $80,000 or $160,000 if you’re married, the credit will start to phase out.
Unfortunately, you can only claim this credit for the first four years of college so once your child goes to graduate school, those expenses don’t qualify. Visit the IRS page  for more information about this credit.
The Lifelong Learning Credit
This credit is similar to the American Opportunity Credit but the differences are important. First, for each child you can choose to use either of these credits in a tax year but they can’t be combined. Next, the Lifelong Learning Credit only covers the costs of tuition. You cannot deduct other college expenses.
The Lifelong Learning Credit also has lower maximum income. To receive the maximum $2,000 credit, those who are single can only make $60,000 or $120,000 if you’re married and benefits start phasing out at $50,000 and $100,000 respectively. The best part about this credit is that there is no four year rule. This deduction can be claimed for any year that you or a dependent of yours is in school. Read about the differences between the two credits by clicking here .
While it’s true that the government offers numerous incentives for those paying college expenses, don’t expect to get much of the money back in taxes. It’s more important than ever to start saving as early as possible for those college costs. While a lot has been said about the skyrocketing cost of a college education, there are currently no viable plans in place to bring those costs back under control. Start a 529 plan in 2012.
(Photo: Ralph and Jenny )