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Tax Planning - Education and Child Tax Benefits

by Brett Backues on December 17, 2011
Child Tax Credit:  A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return. In order to qualify for 2011, the taxpayer must be allowed a dependency deduction for the qualifying child.  Another qualifying determination is that the qualifying child must be younger than you.  The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers.  A portion of the credit may be refundable.  For 2011, the threshold earned income level to determine if it’s refundable is set by statute at $3,000.
Credit for Adoption Expenses:  For 2011, the adoption credit limitation is $13,360 of aggregate expenditures for each child, except that the credit for an adoption of a child with special needs is deemed to be $13,360 regardless of the amount of expenses.  The credit ratably phases out for taxpayers whose income is between $185,210 and $225,210. For 2011, the credit is refundable. For 2012, the credit is scheduled to become nonrefundable.
HOPE Credit and Lifetime Learning Credit:  Back in 2009, significant changes were put in place for the HOPE, including a name change to the American Opportunity Tax Credit.  These changes continue for 2011.  The maximum credit for 2011 is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent) who is enrolled on at least a half-time basis.  The credit is available for the first four years of the student's post-secondary education.  For 2011, the credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers.  Forty percent of the credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes.  The term “qualified tuition and related expenses” includes expenditures for “course materials” (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance).  One way to take advantage of the credit for 2011 is to prepay the spring 2012's tuition.  In addition, if your child's books for the spring semester are known, those can be bought and the costs qualify for the credit.
The Lifetime Learning credit maximum in 2011 is $2,000 (20% of qualified tuition and fees up to $10,000).  A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills.  As with the HOPE (American Opportunity Tax Credit in 2011) credit, eligible students include the taxpayer, the taxpayer's spouse, or a dependent.  For 2011, the Lifetime Learning credit is phased out at modified AGI levels between $102,000 and $122,000 for joint filers, and between $51,000 and $61,000 for single taxpayers.
Coverdell Education Savings Account:  For 2011, the aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account.  This limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between$190,000 and $220,000.  The contributions to the account are nondeductible but the earnings grow tax-free.
Student Loan Interest:  You may be eligible for an above-the-line deduction for student loan interest paid on any “qualified education loan.”  The maximum deduction is $2,500.  The deduction for 2011 is phased out at a modified AGI level between $120,000 and$150,000 for joint filers, and between $60,000 and $75,000 for individual taxpayers.
Kiddie Tax:  For 2011, the kiddie tax applies to: (1) children under 18; (2) 18-year old children who have unearned income in excess of the threshold amount, do not file a joint return and who have earned income, if any, that does not exceed one-half of the amount of the child's support; and (3) children between the ages of 19 and 23 and if, in addition to the above rules, they are full-time students. For 2011, the kiddie tax threshold amount is $1,900.