2011 Educational Tax Benefits

Below is a summary of the major educational tax benefits for 2011. For a more comprehensive and detailed description of all educational tax benefits please refer to IRS Publication 970.

The Tuition and Fees deduction, enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001, allows taxpayers an “above the line deduction” for tuition, fees and related expenses such as books, supplies and equipment required by the eligible school. The deduction does not include the cost of insurance, room and board, medical expenses, transportation or personal expenses.

For 2011, the maximum deduction for these expenses is $4,000 for families filing a joint return with a Modified AGI of below $130,000 ($65,000 for taxpayers filing single). A deduction of $2,000 is allowed for taxpayers whose Modified AGI falls within the phase out limits of $130,000 to $160,000 for taxpayers filing jointly and $65,000 to $80,000 for the taxpayers filing single.

Note: If the taxpayer elects to take the Tuition and Fees deduction, he cannot take the American Opportunity Tax Credit or the Lifetime Learning Credit in the same tax year.

This is an “above the line deduction” for qualified student loan interest paid during the tax year. The maximum amount of this deduction is $2,500 per year. For 2011, the deduction is available to taxpayers whose Modified AGI is less than $120,000 for joint filers and $60,000 for single filers. The deduction also has income phase-out limits. For married taxpayers filing jointly, the limit starts at $120,001 and ends at $150,000 (single filing taxpayers - $60,001-$75,000).

Originally known as the Education IRA until 2001, when its name and benefits were changed. Now known as the Coverdell Educational Savings Account, the annual contribution is $2,000. The contribution is nondeductible but the account grows tax free if the funds are used for qualified K-12 and higher education expenses.

There are income limits and phase-outs for making contributions. For married taxpayers filing jointly, the Modified AGI limit is $190,000 and phases out with incomes between $190,000 and $220,000 (single filing taxpayers is $95,000 with phase out between $95,000 and $110,000).

If withdrawals are for unqualified education expenses or in excess of those expenses, the earnings portion of those unqualified withdrawals are included in the beneficiary’s gross income and an additional 10% penalty is imposed.

Funds in the account must be used before the beneficiary reaches age 30. Any funds in the account after the beneficiary turns 30 must be withdrawn within 30 days and the earning portion is subject to income tax and the 10% penalty.

NOTE: The donor could change the beneficiary to another person in the present beneficiary’s immediate family who has not reached the age of 30 and thus avoid the penalty.

Starting in 2009, the credit/refund can be used in the first four years of post-secondary education. The maximum credit/refund for 2011 is $2,500 per student and is based on the tuition, fees and books paid during the tax year. This credit is a deduction from the taxpayer’s tax liability. If there is no tax liability, the taxpayer could receive up to a 40% refundable credit for each tax year thru 2012.

The credit has phase-out limits: for married taxpayers filing jointly, the Modified AGI limit is $160,000 with a phase-out of the credit for incomes between $160,000 and $180,000; for single taxpayers the income limit is $80,000 and the phase-out range is from $80,000 to $90,000.

The Lifetime Learning Credit can be used for all post-secondary education. The maximum amount of the credit for 2011 is $2,000 per taxpayer (not per student) and is based on the tuition and fees paid during the tax year. This credit is a deduction from the taxpayer’s tax liability. This credit has no refund provision.

The Lifetime Learning Credit also has phase-out limits. For married taxpayers filing jointly, the Modified AGI limit is $100,000 with a phase-out of the credit for incomes between $100,000 and $120,000. For single taxpayers the income limit is $50,000 and the phase-out range is from $50,000 to $60,000.

These plans were authorized under Section 529 of the Internal Revenue Code. The individual plans are set up and administered by the states. There is no federal tax deduction and there is no income limit for contributing to a 529 plan. Earnings from withdrawals are tax free if used for qualified higher education expenses.

A taxpayer can contribute up to $13,000 per year to a plan or use the 5-year election and contribute up to $65,000 with no gift tax liability.

Earnings on unqualified withdrawals or withdrawals in excess of qualified expenses are included in the beneficiary’s gross income and are subject to a 10% penalty.

In August 2006, the “Pension Protection Act of 2006” permanently removed the 2010 Sunset Clause for 529 Plans that was in the 2001 “Economic Growth and Tax Relief Reconciliation Act”.

Losses on investments in 529 Plans may be taken as a loss on the account owner’s income tax return. The account owner can take the loss only when all amounts from that account have been distributed and the total distributions are less than the unrecovered basis. The basis is the total amount of contributions to that 529 Plan. The account owner can claim the loss as a miscellaneous itemized deduction on Schedule A of Form 1040, subject to the 2%-of-adjusted-gross-income limit.

If you have distributions from more than one 529 Plan during the year, you must combine the information (amount of distribution, basis, etc.) from all such accounts in order to determine your taxable earnings for the year. By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts.