Whether you have a high school student who is still debating the merits of Clemson or South Carolina, or you have a child that is working eagerly for his or her degree at Winthrop or another university, the question of how to pay for these college expenses certainly on everyone’s mind. Luckily, there are a few tax credits that can be utilized to offset at least a portion of these expenses.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return:

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases. This means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.

3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).

4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

Our Charlotte CPA firm has recently announced the addition of the Coach4College planning service. We utilize your information to provide you with a personalized plan on how to take advantage of all funding sources, make the right tax decisions, and reduce the overall cost of education. If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give us a call.

If you have been excluded from the education tax credits in the past, the new credits may now change that.  The new American opportunity credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The American opportunity credit, in many cases, offers greater tax savings than existing education tax breaks. Here are some key features of the credit:

• Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.

• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

• The full credit is available for taxpayers whose modified adjusted gross income is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.

Tax planning may be in order to see how this credit change effects your tax liability.  As we have discussed in the past, we do not recomend overpaying your taxes this year in case federal or state governments decide they may repay with I.O.U.’s.  With tax planning and coaching, we can help you adjust your withholdings to increase your net pay now instead of being at the mercy of the taxing authorities to grant you your own money back in the form of a “refund”.