Post-Election Tax Situations: Change in Educational Credits and Deductions

With the sunset of various tax laws at the end of 2012 comes a change in educational tax credits and deductions. Taxpayers could see changes in the tax treatment of the Coverdell Education Savings Account, student loan interest deduction, and the American Opportunity Tax Credit.

Through 2012, the maximum contribution amount to a Coverdell Education Savings Account is $2,000. While these contributions are not tax-deductible, the amounts deposited in the account grow tax free until distributed for qualified educational expenses. Under the current law, the maximum contribution is scheduled to revert to $500 in 2013. At the same time, the expanded definition of qualified education expenses for elementary and secondary school would also expire.

In addition, certain enhancements to the student loan interest deduction are scheduled to expire after 2012. Assuming these enhancements are not extended, the deduction would only be available for the first 60 months of repayment, not the life of the loan. The deduction will also start to phase-out for taxpayers with adjusted gross income of $40,000 and will be completely phased out with AGI of $55,000 ($60,000 and $75,000 for married couples filing joint returns).

Finally, President Obama campaigned on making permanent the temporary American Opportunity Tax Credit, which is scheduled to expire after 2012. The American Opportunity Tax Credit is an enhanced version of the HOPE education tax credit. The AOTC applies to 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. The AOTC applies to the first four years of a student’s post-secondary education and allows for partial refundability for qualified taxpayers. If the AOTC expires, it will be replaced by the HOPE tax credit, which only allows a maximum credit of $1,800 on the first two years of post-secondary education.

If you have any questions regarding these possible tax law changes, please contact your Anders advisor.