Federal Tax Credits and Benefits for us Students

For those taxpayers who took college courses or employment training in 2010, the money spent on these courses can result in lower taxes.  The Internal Revenue Service has specific requirements on how much can be deducted and this article will review these deductions and income adjustments.  Keep in mind that this is for the tax year 2010.  Future tax rules and laws may change and for tax years 2011 and onward, check the IRS website.

While there many ways to discuss the federal tax credits, deductions and adjustments to income, perhaps the best way, or at least the way being used here is to go over them in the order that they show up on IRS Form 1040 which is the long form for filing taxes. 

Line 33 – Student loan interest deduction.  For those students and ex-students who took out loans in order to pay for college, the loan company will provide a statement detailing how much of the monthly payments went to interest on the debt.  This is much like the mortgage interest deduction for people buying a home or business interest deductions. 

Line 34 – Tuition and fees. For this, the Form 8917 will need to be attached.  The first thing this form states is:

Caution! You cannot take both an education credit from Form 8863 and the tuition and fees deduction from this form for the same student for the same tax year. 

That form is discussed below but attempting to claim or use both for the same student is a sure way to get on-going correspondence from the IRS and perhaps an additional bill for penalties and interest.  This form is actually more of a work sheet but what it says is that if the modified adjusted gross income (MAGI) is more than $80,000 for a single filer or $160,000 for a married filer then the tuition and fees can’t be taken.  If the income limit is met, the deduction is either $2000 or $4000 depending on the amount from line 5 of form 8917.  In this case, if the amount is greater than $65,000 (single) or $130,000 (married) then the amount allowed is $2,000.  Needless to say, the IRS has made this more complicated for 2010 than just a few years ago.

Line 49 – Education credits from Form 8863, line 23.  The first thing this form states is:

Caution! You cannot take both an education credit and the tuition and fees deduction from Form 8917 for the same student for the same year.

Once again, the IRS is serving notice to not try claiming credit twice for the same thing!  In the past this form was for the Hope Credit and the Lifetime Learning Credit. Now, the Hope Credit has been renamed the American Opportunity Credit but it is worth noting that the limit on the number of times a student can use the both the American Opportunity and the Hope credit is four times.  After that, the student must use the Lifetime learning credit. 

First the American Opportunity Credit: The MAGI is $90,000 for single and $180,000 for married filers.  Additionally, it can only be used for undergraduate degrees, the student must be enrolled at least half time for one academic term during the year and the student cannot have had a felony drug conviction. 

The Lifetime learning Credit is the second of the two education “credits” available to taxpayers. The MAGI limit is $60,000 single and $120,000 for married filers.  It can be used as many times as desired and there is no felony drug conviction limitation.

To determine which of these credits to use it is best to consult the IRS instructions for form 8863 and use the worksheet and the form to determine the best option.  Read the forms and instructions carefully as the IRS has not made this easy either.

Finally, there is Line 66 American opportunity credit from Form 8863, line 14 – This is the refundable portion of the American Opportunity Credit and the term “refundable” means it counts as a payment and thus can qualify as a tax refund even if the tax filer has no tax obligation. 

As always, consult a tax professional or better yet, read the tax book instructions thoroughly to ensure proper understanding of the forms and the instructions.