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A number of education-related tax incentives are scheduled to expire, or be significantly reduced, after 2012.

Bush-Era Tax Cuts: Education Sunsets

  • 5/10/2012

A number of education-related tax incentives are scheduled to expire, or be significantly reduced, after 2012.

Coverdell education savings accounts

The maximum contribution amount to a Coverdell Education Savings Account (ESA) is $2,000, but is scheduled to revert to $500 after 2012. Current law also treats elementary and secondary school expenses, in addition to post-secondary school expenses, as qualified expenses for Coverdell ESAs.

Impact: Contributions to a Coverdell ESA are not tax-deductible, but amounts deposited in the account grow tax free until distributed for qualified distributions. Total contributions for the beneficiary of a Coverdell ESA under current law cannot be more than $2,000 in any year, no matter how many accounts have been established.

Educational assistance exclusion

The 2010 Tax Relief Act extended the $5,250 exclusion from income and employment taxes of employer-provided education assistance through 2012. The benefit is not taxable to the employee. Employers may deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee through 2012.

Impact: After the sunset, employer-paid educational assistance will be excludable from gross income only if it qualifies under the more stringent working condition fringe rules. Under the fringe benefit rules, the employee must be able to meet the business expense requirements that call for a direct relationship between the course and the employee’s current job.

Comment: Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. To qualify as an educational assistance program, the plan must be written and must meet certain other requirements.

Federal scholarships

The 2010 Tax Relief Act extended the exclusion from income for the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program though 2012. These scholarships carry obligatory service requirements.

Student loan interest deduction

EGTRRA eliminated a 60-month rule for the $2,500 above-the-line student loan interest deduction, and expanded the modified AGI range for phase-out. The 2010 Tax Relief Act extended these enhancements through 2012.

Impact: For 2012, the student loan interest deduction is reduced when modified adjusted gross income exceeds $60,000 for single individuals ($125,000 for married couples filing a joint return), and is completely eliminated when modified adjusted gross income is $75,000 or more for single individuals ($155,000 for married couples filing a joint return).

If the enhancements to the deduction sunset after 2012, the deduction would begin to phase out for single individuals whose modified adjusted gross income, estimated with inflation adjustments, exceeds $50,000 ($75,000 for married couples filing a joint return), and would be completely eliminated when modified adjusted gross income is $65,000 or more for single individuals ($90,000 for married couples filing a joint return).

Comment: The student loan interest deduction is taken as an adjustment to income and is available to non-itemizers.

Higher education tuition deduction

The above-the-line deduction for higher education tuition and related expenses expired after 2011. The higher education tuition deduction was created by EGTRRA and extended by subsequent laws, most recently by the Tax Relief Act, but only through the end of 2011.

Impact: In 2011, the last year in which the deduction was available under current law, the deduction reached a maximum of $4,000 for taxpayers whose modified AGI did not exceed $65,000 ($130,000 for joint filers), and $2,000 for taxpayers whose modified AGI between $65,000 and $80,000 ($160,000 for joint filers).

Comment: The higher education tuition deduction is typically included among the tax extenders for renewal. Although the deduction was renewed for 2010 and 2011, renewal for 2012 and beyond is uncertain.

American Opportunity Tax Credit

The 2009 Recovery Act enhanced and renamed the Hope Education Credit as the American Opportunity Tax Credit (AOTC). For qualified taxpayers, the AOTC is partially refundable. The 2010 Tax Relief Act extended the AOTC through 2012. After 2012, the Hope Credit, with its lower benefits would return.

Impact: The AOTC reaches up to $2,500 of the cost of tuition, fees, and course materials paid during the tax year. The AOTC is based on 100 percent of the first $2,000, plus 25 percent of the next $2,000. Forty percent of the AOTC (up to $1,000) is refundable for lower-income taxpayers.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.

Impact: The Hope Credit was limited to the first two years of post-secondary education. The AOTC may be claimed for all four years of post-secondary education.

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