This credit is up to $2,500 per student in a degree program for the first four years of college

Deduction for tuition and fees. Taxpayers can claim a deduction (also above the line) of up to $4,000 for qualified tuition and fees they pay if they meet the income guidelines (Sec. 222). Qualified expenses for this deduction include only tuition and fees. For 2011, single taxpayers with MAGI less than $65,000 ($130,000 for married filing jointly) can deduct up to $4,000 (Sec. 222(b)(2)(B)). For single taxpayers with MAGI between $65,000 and $80,000, and married taxpayers with MAGI between $130,000 and $160,000, the deduction is reduced to the lesser of $2,000 or the amount paid. For single taxpayers with income over $80,000 ($160,000 for married taxpayers), no deduction is allowed. Married taxpayers filing separately are not eligible for the deduction.

Note that this provision expired at the end of 2011 and, unless retroactively extended (as occurred in 2010 for that tax year through 2011), is not available for 2012 expenses.

For parents to claim this deduction, they must pay the tuition and fees for their child, and they must claim the child as a dependent. The deduction for tuition and fees cannot be taken for the same student in the same year as the American opportunity tax credit or the lifetime learning tax credit (Sec. 222(c)(2)). Additionally, the same expenses cannot be used as qualified expenses for tax-free treatment of savings plan distributions (such as Sec. 529 distributions) and the deduction for tuition and fees or the education credits.

The first $2,000 is a dollar-for-dollar credit for qualified educational expenses. The other $500 of the credit is 25% of the next $2,000 of qualified expenses (Sec. 25A(i)). Eligible expenses for this credit are tuition and fees and other required course expenses including books and other course materials (Sec. 25A(i)(3)), but they do not include room and board. The American opportunity tax credit phases out for single taxpayers with MAGI between $80,000 and $90,000 and for married taxpayers filing jointly between $160,000 and $180,000 (Sec. 25A(d)).

Lifetime learning credit

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Forty percent of the American opportunity credit is refundable. Children cannot claim the credit if they are a dependent on a parent’s tax return; however, any allowable expenses paid by the child can be treated as paid by the parents for purposes of calculating the credit (Sec. 25A(g)(3)). The American opportunity credit is currently authorized only through 2012, when, without congressional action, the credit will revert to the pre-2009 Hope scholarship credit, which was available only for the first two years of college attendance, for a maximum annual nonrefundable credit (in 2008) of $1,800.

American opportunity tax credit

The lifetime learning credit is 20% of the first $10,000 of qualified educational expenses (Sec. 25A(c)), for a maximum credit of $2,000 for any taxpayer; therefore, a taxpayer with multiple qualifying children is still limited to $2,000. The credit is allowed for qualified tuition and related expenses even if for only one class that is not part of a degree program. As is the case for the American opportunity credit, eligible expenses do not include room and board, and, unlike with the American opportunity credit, they do not include books and other course materials. The lifetime learning credit is not limited to the first four years of college, so it is available for graduate school. The lifetime learning credit phases out for single taxpayers with MAGI between $52,000 and $62,000 for 2012 ($51,000 and $61,000 for 2011) and for married taxpayers between $104,000 and $124,000 ($102,000 and $122,000 for 2011).

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A $2,500 credit from the American opportunity credit is more beneficial than a $4,000 tuition and fee deduction at any current tax rate. The income phaseouts are also higher for the American opportunity credit. For the first four years a child attends a regular degree-granting college or university, parents are better off claiming the American opportunity credit if they qualify.

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