Mapping Your Future: The Cost of Higher Education

College is expensive. Most parents, when faced with that first year of college tuition payments cringe at the thought.  One significant way parents can ease those painful costs is with available tax credits.

An education credit reduces the amount of tax owed on your tax return.  If the credit reduces your tax to less than zero, you may even receive a refund.

 

There are two education credits available: the American Opportunity Tax Credit and the Lifetime Learning Credit.

 

There are additional rules for each credit, but first you must meet all three of the following criteria for either credit:

  1. You, your dependent or a third party pays qualified education expenses for higher education.

  2. You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.

  3. The eligible student is yourself, your spouse or a dependent you list on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

You also cannot claim any of the credits if you claim a tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

To be eligible for AOTC, the student must:

  • Be pursuing a degree or other recognized education credential

  • Be enrolled at least half time for at least one academic period* beginning in the tax year

  • Not have finished the first four years of higher education at the beginning of the tax year

  • Not have claimed the AOTC or the former Hope credit for more than four tax years

  • Not have a felony drug conviction at the end of the tax year

What are the income limits for AOTC?

  • To claim the full credit, your MAGI,(modified adjusted gross income shown on your tax return) must be $80,000 or less ($160,000 or less for married filing jointly).

  • You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).

  • You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

What is the AOTC worth?

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.

Lifetime Learning Credit

The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses–including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

To be eligible for LLC, the student must:

  • Be enrolled or taking courses at an eligible educational institution

  • Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills

  • Be enrolled for at least one academic period* beginning in the tax year

What are the income limits for LLC?

  • To claim the full credit, your MAGI◊, modified adjusted gross income must be $52,000 or less ($104,000 or less for married filing jointly).

  • If your MAGI is over $52,000 but less than $62,000 (over $104,000 but less than $124,000 for married filing jointly), you receive a reduced amount of the credit.

  • If your MAGI is over $62,000 ($124,000 for joint filers), you cannot claim the credit.

What is the LLC worth?

The amount of the credit is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per taxpayer. The LLC is not refundable. So, you can use the credit to pay any tax you owe but you won’t receive any of the credit back as a refund.

Claiming either credit

Generally, students receive a Form 1098-T, Tuition Statement, from their school by January 31. This statement helps you figure your credit.  To claim the LLC, you must complete the Form 8863. Attach the completed form to your Form 1040 or Form 1040A.

*Academic Period can be semesters, trimesters, quarters or any other period of study such as a summer school session. Academic periods are determined by the school. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.



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