Tax Primer on Higher Education Expenses

Is your child preparing to start the next semester of college in January? It can be a costly proposition for many parents, but at least you may be able to salvage some tax benefits. In particular, there are three main tax breaks for higher education expenses. The catch: You can claim only one of them for a student on your 2013 return.

Note that the AOTC is based on expenses per child. For example, if a couple with three children in school has $10,000 of qualified expenses for each one, the parents can claim an AOTC of $7,500. Qualified expenses include tuition, mandatory enrollment fees, and books and course materials, but not room and board, student health insurance or other fees.

The AOTC is phased out if your modified adjusted gross income (MAGI) exceeds certain limits. For 2013, the range is $80,000 to $90,000 of MAGI for single filers and $160,000 to $180,000 for joint filers.

The lifetime learning credit is also phased out based on MAGI. For 2013, the MAGI phaseout range is from $53,000 to $63,000 for single filers and $107,000 to $127,000 for joint filers.

    1. American Opportunity Tax Credit (AOTC): The AOTC—formerly known as the Hope Scholarship credit—was scheduled to expire after 2012 but was extended for five years by the American Taxpayer Relief Act (ATRA). For 2013, the maximum AOTC is $2,500 and is available for four years of study. (Previously, the maximum credit was $1,800, and the AOTC was limited to the first two years of study.) Under ATRA, 40% of the credit is refundable.
    2. Lifetime learning credit: The maximum lifetime learning credit is $2,000 per taxpayer. For instance, if the same couple above incurred $10,000 of qualified expenses for each of their three children, the total lifetime learning credit for the parents would be limited to $2,000. Therefore, the AOTC is often more advantageous if you have two or more children in school.
    3. Tuition deduction: The tuition deduction technically expired after 2011, but ATRA revived it for the 2012 tax year and extended it through 2013. Generally, the deduction is allowed for qualified education expenses paid last year for an academic period beginning in 2013 or during the first three months of 2014.

For 2013, single filers can claim a maximum $4,000 deduction for a MAGI of up to $65,000 and a maximum $2,000 deduction from $65,000 to $80,000 of MAGI. Joint filers may claim a $4,000 deduction for a MAGI up to $130,000 or a $2,000 deduction up to $160,000.

This is only an overview of the three main tax breaks for higher education. Others, such as a limited deduction for student loan interest, may be available. Investigate all the possibilities.