If you have children in college, don’t miss out on education tax credits.
American Opportunity Tax Credit – For 2013, you may claim the American Opportunity Tax Credit (AOTC), formerly known as the Hope Credit. The AOTC is equal to 100 percent of up to $2,000 of qualified higher-education tuition and related expenses, plus 25 percent of the next $2,000 of eligible expenses. The maximum credit is $2,500 per year for each eligible student.
The full credit is available to joint filers with modified adjusted gross income (MAGI) of up to $160,000. It phases out ratably until no credit is available for those with MAGI above $180,000. Others begin to lose the credit at an MAGI level of $80,000, with full phaseout at $90,000 of MAGI.
The AOTC may be elected for a student’s expenses for a maximum of four tax years. The credit is available only for students who have not completed the first four years of postsecondary education as of the beginning of 2013.
Up to 40 percent of the credit – a maximum of $1,000 per student – may be refundable. No portion of the credit is refundable if the person claiming the credit is a child subject to the kiddie tax or a resident of a U.S. possession.
Lifetime Learning Credit – Those not eligible for the AOTC may elect the Lifetime Learning Credit. This credit is equal to 20 percent of up to $10,000 of qualified tuition and related expenses paid during the tax year. The maximum credit for a tax year is $2,000, regardless of the number of students.
For 2013, the credit is phased out ratably for taxpayers with MAGI from $53,000 to $63,000 ($107,000 to $127,000 for joint filers).
Education tax credit claims – If you pay the college education expenses of a child you claim as a dependent, only you may claim the education credits. However, if you elect not to claim your child as a dependent, the student may claim the education credit for qualified expenses, including those paid by you. This election may be beneficial if your MAGI exceeds the limits for the education credits.
For example, assume a married couple with MAGI of $250,000 is in the 33 percent marginal tax bracket for 2013. Their 19-year-old son is a freshman in college. Claiming their son as a dependent would save $1,287 in taxes (33 percent of $3,900 dependency exemption). Assume also that the parents spend $24,000 in AOTC-eligible expenses for their son and the son has $15,000 of taxable income from a part-time job.
The parents’ income prevents them from claiming an education tax credit. If they choose not to claim their son as a dependent, the son may use the AOTC to eliminate completely his $1,803.75 tax liability, resulting in a $516.75 tax savings for the family.
However, the son would not be able to claim a refundable AOTC because he is subject to the kiddie tax. He is a full-time student age 19-23, and his earned income does not exceed half of his support.
Note that, even though the parents elected not to claim the son as a dependent, the child still cannot claim a $3,900 exemption for himself.