For the lifetime learning credit, only expenses of $8,000 for both children are qualified educational expenses, because the $1,000 per child for books does not qualify. A taxpayer erican opportunity credit and lifetime learning credit) or one education credit and the deduction for tuition and fees for the same child in the same year. However, taxpayers are allowed to claim the American opportunity payday loans Ohio credit for one child and the lifetime learning credit for another child (or for the parents). Column 3 of Exhibit 1 assumes one child qualifies for the American opportunity credit but that the other child qualifies only for the lifetime learning credit. In this case, the $4,000 for tuition and fees and the $1,000 for books qualify for a $2,500 American opportunity credit for one child, and the $4,000 for tuition for the other child qualifies for a lifetime learning credit of $800 ($4,000 ? 20%).
Tuition and fees of $8,000 are qualified educational expenses for the tuition and fees deduction; however, this deduction is limited to $4,000 total. The $2,000 expense for books does not qualify for the tuition and fees deduction.
Exhibit 2 shows that the credits and the tuition and fees deduction do not apply to room and board. Most full-time universities have tuition and fees of at least $4,000 per year, which will use all the available American opportunity credit. Sec. 529 savings plans and Coverdell ESAs apply to room and board for students attending at least half time, as well as tuition and fees. Therefore, it is beneficial to take tax-advantaged savings plan distributions to pay for room and board and pay tuition and fees with current income or loan proceeds to qualify for one of the credits or the tuition and fees deduction. By careful planning, taxpayers can maximize each benefit.
If a student uses loan proceeds to pay qualified educational expenses, the student is eligible to claim an education credit or the deduction for educational expenses based on the amount of loan money used to pay these expenses
Example. Sally has $18,000 in a Sec. 529 savings plan. Her total annual educational expenses are $9,000: $4,000 per year for tuition and fees, and $5,000 per year for room and board. Sally could take a $9,000 distribution from her Sec. 529 plan in each of the first two years to pay all of her expenses. The distributions would not be taxable. However, she would not qualify for the education credits in those years. Instead, Sally could take a distribution from her Sec. 529 plan each year to pay only the $5,000 needed for room and board. By paying tuition and fees from nonSec. 529 funds, Sally (or her parents, if she is a dependent) could claim the American opportunity credit and receive a credit of $2,500 for each of the four years she is in college.
The $1,000 for books for the child eligible for the lifetime learning credit does not qualify for a credit
Some education benefits are available at the state income tax level. Since many states start the calculation of state taxable income based on federal adjusted gross income (AGI), the deduction for tuition and fees could reduce state taxable income and, therefore, state taxes, unless the state requires the amount to be added back for state income tax purposes.
Interest earned on U.S. government savings bonds used for higher educational expenses is exempt from federal taxation. While the interest rates on these investments are low, these bonds are also exempt from state income taxes.
