College Tuition for Children & Grandparent Tax Deductions
Grandparents may receive a tax credit or deduction for a grandchild's college tuition, but only if the grandchild is a dependent. Making the appropriate choice of credit or deduction will depend on the student's enrollment status, the amount of educational expenses and the grandparents' income and tax bracket.
Dependency
- A grandchild qualifies for dependency under either the qualifying child test or the qualifying relative test. He is a qualifying child if he lives in the same household most of the time (except when away at school), attends college half time or more, is under 24 years of age and does not provide more than half of his support. He is a qualifying relative if the grandparents provide more than half his support and he does not earn more than $3,650 during the year. The grandparents cannot claim the grandchild as a dependent if the parents also claim him.
American Opportunity Credit
- Grandparents who pay tuition for a dependent may be eligible for the American Opportunity Credit (AOC). This dollar-for-dollar tax credit can be used only for the first four years of undergraduate education for students who attend half time or more. The credit applies to tuition and required fees, but not transportation, room or board. It covers textbooks only if they must be purchased directly from the school.
The AOC is calculated as 100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000, for a maximum credit of $2,500. Forty percent of the credit is refundable to taxpayers who have no tax liability. It is phased out for joint filers with modified adjusted gross income (MAGI) above $160,000 and single filers above $80,000, as of 2011.
Lifetime Learning Credit
- Grandparents may consider claiming the Lifetime Learning Credit (LLC) instead of the AOC. The LLC is also a dollar-for-dollar credit and applies to postsecondary tuition and required fees, but not to textbooks, transportation, room or board. Unlike the AOC, students may attend less than half time and for more than four years.
The LLC is equal to 20 percent of qualified expenses up to $10,000, for a maximum credit of $2,000. The credit is not refundable. It is phased out for joint filers with MAGI above $100,000 and single filers above $50,000, as of 2011.
Comparison of Credits
- If taxpayers qualify for both the AOC and LLC, they will usually obtain a larger credit by choosing the AOC. However, the LLC may be the only credit available if the student has been enrolled in college for more than four years, is attending less than half time or has a felony drug record.
Tuition and Fees Deduction
- Grandparents may take a deduction from adjusted gross income instead of a credit for a dependent's expenses. The maximum tuition and fees deduction is $4,000, based on the same qualifying expenses as the LLC. It is phased out for joint filers with MAGI above $130,000 and single filers above $65,000, as of 2011.
For taxpayers in a marginal tax bracket above 20 percent, the deduction will usually produce greater tax savings than the LLC, but not the AOC. If qualified expenses are well above $4,000, the LLC will be more valuable than the deduction even for higher-bracket taxpayers.
Read more: College Tuition for Children & Grandparent Tax Deductions | eHow.com http://www.ehow.com/info_11386339_college-tuition-children-grandparent-tax-deductions.html#ixzz1gixoaqqi
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