In 2010, the American Opportunity tax credit expanded and changed the older Hope credit along with a few other aspects of other tax breaks for college families. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extend the amended college expenses tax credit through 2012. This law allows parents and independent college students to obtain deductions or credits from taxes owed based on certain expenditures on higher education. There are several opportunities to save on your annual tax payment.
This tax break is allowed for fees and tuition paid for higher education by the tax filer for them or a dependent child. Up to $4,000 can be deducted above-and-beyond the standard deduction, even without itemizing. A smaller $2,000 deduction is also possible for some taxpayers depending on adjusted gross income.
Student Loan Interest Deduction
Changes were also made in the rules regarding the deduction possibilities for interest paid on student loans. This is not only important to college graduates but for those with current expenses. Because the Parent Loan for Undergraduate Students (PLUS) allows for immediate repayment any family choosing that option over deferring until after the student's graduation could potentially utilize this tax break.
American Opportunity Tax Credit
The American Opportunity credit allows families or independent students to claim up to 100% of the first $2,000 paid in tuition and fees plus 25% of the next $2,000. Therefore, the maximum tax break from this program is $2,500 and is only available during the first four years of a student's academic career.
Lifetime Learning Tax Credit
Still around from the past is the Lifetime Learning credit, which is less restrictive than the American Opportunity Tax Credit and is mainly intended to help defray college costs after the first four years, when AOTC eligibility expires. It is available for an unlimited number of years and does not have any minimum enrollment requirements. Continuing education and graduate courses are included as applicable expenses.