Education Strategies

There are several tax-advantaged strategies for those saving for a child's education, such as 529 plans, Coverdell Education Savings Accounts (ESAs), and education tax credits. Navigating the different options and the temporary nature of some opportunities, however, can be challenging. Give us a call to discuss tax breaks for education.

Education Tax Credits

If you are currently paying higher education expenses, two federal tax credits may help lessen your tax bill: the American Opportunity Tax Credit and the Lifetime Learning Credit.

The American Recovery and Reinvestment Act of 2009 (ARRA) renames the Hope Scholarship Credit the American Opportunity Tax Credit. The maximum credit amount is increased to $2,500 for 2009 and 2010, up from $1,800 previously. The new law expands the credit to be available for all four years of college and to cover the cost of course materials. Income phase-out levels for the credit are also raised to $160,000 of AGI for joint filers and $80,000 of AGI for single filers in 2009. In addition, 40% of the credit becomes refundable, which could enable lower-income taxpayers to get money back from the IRS.

The Lifetime Learning Credit, which applies to undergraduate study, as well as graduate and professional education pursuits, could be worth up to $2,000. For 2009, eligibility phases out for joint filers with modified AGI of $100,000 ($50,000 for single filers). If a student qualifies for both credits in the same year, you may claim either credit but not both.

If you cannot claim either credit because your income is too high, your child can take the full credit if he or she has sufficient taxable income. However, you will not be able to claim a dependency exemption for the child. Your savings, therefore, will be the amount of the credit less the tax benefit of the lost dependency exemption. But, be aware that, based on your income, the exemption may be reduced.

Consider whether it might be more beneficial for your child to file his or her own tax return and claim an education tax credit. We can help you calculate which option is best for your family.