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Educational tax breaks, at times confusing, often go unused

Understanding each tax benefit can help you choose the one that will help the most. The IRS, though, does not allow more than one tax break on the same dollars spent by a student.

Arizona Republic via Associated Press/File 2013

Understanding each tax benefit can help you choose the one that will help the most. The IRS, though, does not allow more than one tax break on the same dollars spent by a student.

Rocco Abbatemarco, 42, a middle school teacher from New York City, recently moved to Portland, Maine, where he landed a teaching spot at a youth correctional facility. His new job required that he be certified in special education. To do so, Abbatemarco is taking accredited online courses, studying in the evening and on weekends.

With two young children and a stay-at-home wife, he is finding that tuition payments are adding a strain to the family budget. But Abbatemarco is hoping at least one of the three available federal government tax breaks will help ease the pain come April 15 next year. ‘‘I just finished my taxes, and wished I had started my courses last year,’’ he said. ‘‘I could use the break.’’

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Fortunately for Abbatemarco, some of the existing tax credits and deductions for education that were extended as part of tax legislation passed in January are particularly well suited to continuing education students. But determining which ones make the most sense for returning or part-time students can be confusing.

“People don’t always take advantage of these breaks because they don’t understand them,’’ said Kalman Chany, author of ‘‘Paying for College Without Going Broke.’’ A report by the Government Accountability Office that analyzed 2005 tax returns found that 19 percent of eligible taxpayers did not claim an education credit or deduction.

What’s more, how tuition is paid, where and how much a person goes to school, and income can affect whether someone will qualify for tax breaks. Here is a look at what credits and deductions are available:

Lifetime Learning Credit

Students do not have to be enrolled in a degree program to qualify for this credit. In fact, it can be used by someone taking just one postsecondary course, as long as it is at a qualifying institution. Because it is a credit, it reduces the tax bill on a dollar-for-dollar basis.

The credit may be taken for 20 percent of tuition and fees paid during the calendar year, up to $2,000 on the first $10,000 of expenses. For the 2012 tax year, the credit begins to phase out for single people earning more than $52,000 and married couples earning more than $104,000.

As the name implies, this credit was intended for older students looking to retrain or to further their educations, perhaps even in retirement. But experts say they believe those taking this credit are mostly young graduate students. ‘‘That’s a missed opportunity for adults who want or need to go back to school,’’ Chany said.

The Internal Revenue Service does not collect data on who takes the Lifetime Learning Credit, but experts say they believe that older students seeking additional training, like Abbatemarco, are the exception. Mark Kantrowitz, publisher of FinAid.com, said continuing education students often miss this credit because they mistakenly believe it is only for students in a degree program.

American Opportunity Credit

This credit modified the existing Hope Credit to allow more parents and students to qualify. Because of restrictions on this credit, it is primarily used by parents paying for their children’s undergraduate education. But adults returning to school to finish or get an undergraduate degree can qualify, as well.

Students, either taxpayers or their dependents, qualify the tax filer for a credit of up to $2,500 a year per student for tuition, fees, and course materials for each of four years in an undergraduate program. Those going back to graduate school or taking classes but not pursuing a degree would not qualify for the credit. But someone who was, say, going back to finish an undergraduate degree while that person’s child was attending college could receive the credit for both students.

In addition, the American Opportunity Credit is a refundable credit. That means that qualifying taxpayers who owe no tax will receive 40 percent or up to $1,000 of the credit as a refund. Students who take the Lifetime Learning Credit may not take this credit.

The full credit is available to people whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit phases out for people with incomes above those levels.

Tuition and fees deduction

A deduction allows a taxpayer to lower the amount of income on which taxes are paid, which in turn often lowers the tax bill. In most cases a credit is more desirable than a deduction, but continuing education students whose incomes are too high to qualify for the Lifetime Learning Credit and who do not otherwise qualify for the American Opportunity Credit may qualify for the tuition and fees deduction.

Someone single and earning $80,000 or less can take a deduction of up to $4,000 for qualified education costs for that person or a dependent; those married and filing jointly can take the deduction if income is $160,000 or less. There are no restrictions on the number of years the deduction can be taken, and it does not matter if attendance is full time or part time.

Understanding each tax benefit can help you choose the one that will help the most. Chany recommends that continuing education students also keep an eye on how they pay for qualified expenses. Tuition and fees paid from a tax-advantaged account like a 529 or Coverdell Education Savings Account, for example, will not qualify for a tax credit or deduction. The reason? The IRS does not allow more than one tax break on the same dollars spent.

Finally, keep in mind that taking a tax credit or deduction, even if some of the money is refunded, will not affect financial aid. True, taxes paid are considered in the financial aid formula. If you pay less taxes because of education benefits, you may assume that this will increase your expected contribution to education expenses. But financial aid forms ask for information about this so that credits will not be counted against you in financial aid calculations.

For more information on tax credits and deductions, see IRS Publication 970. You may also want to consult an accountant with expertise in education tax benefits.

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