As the fall semester reaches its midpoint, it’s a good idea for students and their parents to check if they can utilize college tax credits or any other tax benefits for education when it’s time to file their 2016 tax returns. The American Opportunity Tax Credit or Lifetime Learning Credit is available to most taxpayers who pay certain qualifying expenses for a student eligible under these credits. In order to be eligible, the student must be the taxpayer, his or her spouse, and his or her dependants. The credits themselves apply to students in both for- and non-profit institutions, including vocational schools, colleges, and universities. However, while many taxpayers qualify for both credits, only one can be claimed per eligible student per year.
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These two credits differ in that the Lifetime Learning Credit provides a maximum credit per each tax return, while the American Opportunity Tax Credit provides a separate credit for each eligible student. The credits are also subject to incomes limits that may reduce the amount claimed on the next tax return. Students generally receive Form 1098-T from the educational institution by January 31, showing tuition paid and other important financial information relating to education costs. However, this information is not always clear and can be clarified by a qualified and experienced accountant.
There are several key differences between the two credits. The maximum annual credit for the Lifetime Learning Credit is $2,000 per tax return, whether undergraduate or graduate student. This credit can’t provide a benefit to those who already owe no taxes on their return. While the student does not need to be enrolled at least half-time to claim this credit, the student must be enrolled either as part of a degree program beyond the level of high school equivalency or to maintain and/or improve employment skills.
Tuition, enrollment fees, and other course related fees qualify as qualified or eligible expenses for the credit. In order to calculate the credit, the credit is equal to twenty percent of the amount spent on eligible expenses across all students on the return. In essence, the full credit is only available if a taxpayer paid $10,000 or more in qualifying tuition and other related course fees and has sufficient tax liability to be eligible for the credit itself.
In order to qualify for the Lifetime Learning Credit, the full credit can be claimed by taxpayers who claim a modified adjusted gross income, or “MAGI,” no greater than $55,000, or for married couples filing jointly with a MAGI of $111,000. Above these levels, the limit for singles, those claiming head of household status and widows and widowers is $65,000, and married couples filing jointly have an upper limit of $131,000.
The maximum annual credit for the American Opportunity Tax Credit is $2,500 per student, as opposed to entire tax return. This credit may only be claimed for four years per student, and only if the student did not complete their first four years of post-secondary schooling before 2016. The credit is calculated by using one hundred percent of the first $2,000 on qualified expenses, and twenty-five percent of the next $2,000. In this case, the full $2,500 credit may be taken by taxpayers who have paid in excess of $4,000 in qualified expenses. While tuition and fees are qualified expenses, eligible under the credit, room and board are not. In addition, up to forty percent of the credit is refundable, so even those with no tax liability can receive a payment of up to $1,000 per student.
In order to qualify for the American Opportunity Tax Credit, the full credit can be claimed by taxpayers who claim MAGI no greater than $80,000, or for married couples filing jointly with a MAGI of $160,000. Above these levels, the limit for singles, those claiming head of household status and widows and widowers is $90,000, and married couples filing jointly have an upper limit of $180,000.
There are other ways to benefit on the next tax return using education related deductions. The benefits of the credits may be gained throughout the year by having a lower amount of tax deducted from each paycheck. In addition, students and parents may take advantage of scholarships and grants, usually tax deductible when used for tuition, fees, and course materials, but not for room, board, and other expenses. Students and parents may also benefit from deductions for tuition and fees, student loan interest deductions of up to $2,500 per year, savings bonds used to pay for college which usually are interest fee if purchased after 1989 by taxpayers over 24 years old, qualified tuition, or 529 plans, and finally taxpayers who are the parents of students up to age 24 may claim a dependent exemption and the Earned Income Tax Credit.
While educational credits and deductions are potentially a powerful tool for savings, they can be difficult to properly utilize without someone who has been educated in their application. An experienced accountant will be able to help you navigate the provisions of the tax code and maximize your savings on your next return.