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With another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American Opportunities and Lifetime Learning Credits are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

• The credit is only available for 4 tax years per eligible student. 
• The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

• Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
• Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
• Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

• Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Student loan interest deduction of up to $2,500 per year.
• Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

No federal deduction is allowed for contributions to a Qualified Tuition Program account; however, qualifying distributions from the account will be tax fee.  This means that all of the growth and earnings in the account are tax free provided that the proceeds are used for qualifying education expenses of the account beneficiary.

You can subtract contributions you made to an Oregon 529 College Savings Network account during the tax year up to $4,455 on a joint tax return or up to $2,225 for all other filing statuses (single, head of household, or married filing separate). Each state has a plan or plans that they specifically sponsor.   To qualify for the subtraction the contributions must be made to the Oregon plan and not one of the plans sponsored by another state.  

The overall limitation on contributions is the amount necessary to provide for the qualified expenses of the beneficiary.  There is no AGI limitation as there is with so many other provisions of the tax code.  Contributions are considered a gift so you are subject to the gift limitation rules. Currently the maximum gift exclusion is $14,000 per year.  You can elect to make a larger contribution in a given year and account for it ratably over the next 5 years.  For example, one could contribute $70,000 to their grandchild's 529 plan in 2013 and apply the the gift tax limit for the next 5 years (5 x $14,000 = $70,000).  No other gifts or contributions could be made to that grandchild during the 5 year period without triggering gift tax issues.

Because there is no deduction for this item on the federal return, the timing of the contribution is not particularly important for federal purposes.  However, to receive a subtraction on the Oregon return, the contribution must be made by the due date of your tax return including extensions.

Oregon also has a carryforward provision.  If you make a contribution that is greater than the maximum deduction allowed for a particular year, you may carry forward the excess and and deduct it over the next 4 years.

Distributions from a qualified tuition program (529 plan) are excluded from income if the proceeds are used for qualified higher education expenses.  If the proceeds are not used for qualified education expenses the earnings portion of the distribution will be subject to tax and most likely a 10% penalty on top of that.  (Some exceptions apply to the application of this penalty such as the death or disability of the beneficiary.)

Qualified higher education expenses include:

• Tuition, fees, books, supplies and equipment required for attending an eligible school.
• Reasonable costs of room and board for those who are at least 1/2 time students in a degree program.
• expenses of a special needs beneficiary with a physical, mental or emotional condition that requires additional time to complete his/her education.

Yes. There are no tax consequences if the account balance is rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 plan of one of your children into a sibling's plan without penalty.  Nor is there any tax consequence to changing the designated beneficiary to a qualifying member of the beneficiaries family.   You may change the beneficiary or roll the account balance over to the following:

1.      Spouse of the beneficiary

2.      Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

3.      Brother, sister, stepbrother, or stepsister.

4.      Father or mother or ancestor of either.

5.      Stepfather or stepmother.

6.      Son or daughter of a brother or sister.

7.      Brother or sister of father or mother.

8.      Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

9.      The spouse of any individual listed above.

10.    First cousin.