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College Tuition and Taxation 101

September 4, 2013

The beginning of September is synonymous with the back-to-school season. If you have a child attending college, or if you are a student yourself, September is also likely to be synonymous with the beginning of annual tuition payments. While attending and paying for college may be taxing in many ways, there is some good news when it comes to tax deductions and credits related to college tuition.

As part of The American Taxpayer Relief Act, the legislation passed by Congress to avoid a “fiscal cliff” and maintain tax cuts, several tax benefits have been extended to help ease the burden of paying for classes at eligible education institutions. Tax benefits include:

The American Opportunity Credit, previously known as the Hope Credit, provides an annual credit of $2,500 per student for the costs of tuition, fees, and course materials for the first four years of an individual's post-secondary education. This tax credit is available to households with a modified adjusted gross income of $80,000 or less for single filers or $160,000 or less for married filers filing jointly.

The Lifetime Learning Credit can also lower a household's tax burden by reducing the cost of undergraduate or graduate education, even for those students who choose to take only one class at a time. The tax credit can be applied to 20%, or $2,000, of the first $10,000 of college tuition and related expenses each year. It can be used for approved expenses incurred by any member of a household enrolled at an eligible education institution.

Tuition-based tax deductions can be used by single tax filers with income between $65,000 and $80,000 and married joint filers with an income between $130,000 and $160,000.These deductions allow tax filers to claim $2,000 in tuition and related fees, depending on their tax situation. Taxpayers do not have to itemize in order to claim this benefit.

Employer-sponsored tuition assistance deductions may also be used to reduce your tax burden. The IRS allows an employee to exclude taxable income up to $5,250 per year when they receive employer-provided tuition assistance for undergraduate or graduate classes. Employers who offer tuition assistance to their employees can also deduct these costs as a business expense.

While we have outlined some of the most common tax deductions and tax credits available to individuals paying college tuition, there are many variables to consider when planning the most effective tax strategy for your unique situation. We would be happy to discuss your options for mitigating your tax expenses and reducing the costs of college education. Contact our firm today to speak with one of our tax professionals.

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