Tax help- college deductions/credits

[kellia]

Tax help please! I am working on our taxes and dd started college in Sept, 2013. She is currently going to a community college and will transfer to a university after 2 years. I am confused about which tax break to take this year.

Her 1098-T for 2013 has her tuition expense listed for Fall 2013 and Winter 2014 since she registered in Dec. I know the Amer. Opportunity Credit can only be used for 4 years of school. Should I use it now when her tuition is less or just take the Lifetime Learning credit now and save the Amer. Opp. Credit for when her tuition is a lot more? The difference between the two is almost $2000 this year. I had thought we'd only have the fall semester for our taxes this year, but since they have a whole year of tuition listed I'm not sure what to do now...

 

[Solid Snake]

Tax help please! I am working on our taxes and dd started college in Sept, 2013. She is currently going to a community college and will transfer to a university after 2 years. I am confused about which tax break to take this year.

Her 1098-T for 2013 has her tuition expense listed for Fall 2013 and Winter 2014 since she registered in Dec. I know the Amer. Opportunity Credit can only be used for 4 years of school. Should I use it now when her tuition is less or just take the Lifetime Learning credit now and save the Amer. Opp. Credit for when her tuition is a lot more? The difference between the two is almost $2000 this year. I had thought we'd only have the fall semester for our taxes this year, but since they have a whole year of tuition listed I'm not sure what to do now...

This is really a judgement call, as opposed to one option being preferable to another. In a perfect world, I agree that the best path would be to wait until she transfers to a university - where tuition costs are much greater. However, tax credits/deductions are year to year and can change at the whims of politicians. There have been calls over the recent years for tax "reforms", which would likely eliminate a lot of credits and deductions. Will tax reform come in the next couple of years given the climate? Unlikely, but certainly possible. If it were me, I'd take the credit now rather than later since politicians cannot be trusted to keep promises.

 

[runwad]

I'm planning on using the American Opportunity Tax credit as it's worth $2,500 and the Lifetime is only up to $2k. Plus this one is scheduled to disappear in 2017:

http://taxes.about.com/od/deductionscredits/qt/American-Opportunity-Tax-Credit.htm

The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. The tax credit is scheduled to have a limited life span: it will be available only for the years 2009 through 2017, unless Congress decides to extend the credit to other years.

 

[Sadie22]

I've been using the boxed CD version of Turbotax Home and Business for years. When we had education expenses, the software would figure out which credit or deduction would be best to take that year. Of course, we could override the selection if we so desired.

 

[mom2alix]

The AOC is only available for 4 years and only for undergrad. Do you think she will take more than 4 years to finish undergrad? I would probably take the AOC now, especiallly since it is so much more money.

 

[Mickeyluver37]

The 1098-T is based on when you actually paid the tuition. Individual people are "cash basis" tax payers. This means that if you paid the tuition in 2013, it's deducted in 2013. It works the other way too...if you worked the last 2 weeks in December 2013, but your paycheck was paid out on 1/3/14, for example, that is 2014 income.

I would definitely take the larger credit NOW, unless you didn't even pay enough to claim the entire $2,500. Then it's really a judgement call. You would only get 20% of the first 10K on the the lifetime learning credit, (that's why you're seeing a difference of $2,000) but might get to deduct the full $2,500 American Opportunity Credit in years 2014-2017.

The other thing to consider might be income, or income potential in the next few years. American Opportunity Credit phases out at 160-180K in income, but the Lifetime Learning phases out at 107k-127K. If you're making under 127K now but might be making more that 5th year she's in school, it could be the only way to get credits for 5 years (assuming married filing jointly.)