Education Expenses – Earning Credit Where Credit is Due

If you’re paying for postsecondary education expenses, tax credits can provide valuable savings. Unlike deductions,  which reduce the amount of your income that’s taxed, credits reduce your tax bill dollar for dollar.

But modified adjusted gross income (MAGI)-based limits apply. Partial credits are available to taxpayers whose MAGIs are within the applicable phaseout range, and the credits are eliminated for those whose MAGIs exceed the top of the range.

If your MAGI is too high, your child might qualify (assuming the expenses are for his or her education). You’ll lose your dependency exemption for the child, but the tax savings from the credit will likely be greater than the savings you’d enjoy from the exemption.

So, regardless of your income, it’s good to be aware of the education credits:

American Opportunity credit.  Available only for the first four years of postsecondary education, the credit is 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses for the year. The maximum annual credit allowed per student is $2,500. The MAGI phaseout ranges are the same for 2011 and 2012: $160,000–$180,000 for married couples filing jointly and $80,000–$90,000 for other filers.

Lifetime Learning credit.  Available beyond the first four years of postsecondary education, the credit is 20% of the first $10,000 of qualified expenses for the year, for a maximum credit of $2,000 per tax return. The MAGI phaseout range limits increase for 2012: $104,000–$124,000 for joint filers and $52,000–$62,000 for other filers — up $2,000 and $1,000, respectively.

Additional rules and limits apply, so consult your tax advisor to determine if you or your child is eligible. •