Several tax credits for investors saving for college were extended for two years in the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The contribution limit for the Coverdell Education Savings Account program, which was scheduled to revert to $500, was maintained at $2,000 and extended through 2012.
Depending on income level, investors may set up a Coverdell account to fund education expenses. Contributions to these accounts are not tax deductible, but distributions are tax free as long as they do not exceed the amount of qualified education expenses, such as tuition and fees, books, supplies and equipment, or qualified expenses for room and board, for the year.
The tax law also extended, through 2012, the option for using Coverdell funds to cover the cost of private elementary or high school education.
The American Opportunity Tax Credit was also extended for two years. The program gives taxpayers a maximum annual credit of $2,500 per student to help cover the cost of college tuition.
In addition, the law extended the option for taxpayers to deduct interest on a student loan through 2012. The provision allows for a deduction of up to $2,500 for couples with adjusted gross income of less than $110,000 and for individuals earning less than $55,000.
And the tax deduction for qualified college expenses was also extended, but only through 2011. This provision allows for a maximum deduction of $4,000 for individuals earning less than $65,000 and for couples with a combined income of less than $130,000.
With only temporary extensions, taxpayers have limited time to take advantage of these tax credits. A current review of eligibility for the tax credits may be a timely discussion.