Find Out About Tax Credits that Can Help Offset the Cost
There is no doubt that the cost of college can be high. Outside of winning the lottery or racking up student loan debt, there’s another way to help if you are footing the bill – whether it be for you, your spouse or one of your dependents.
There are two tax credits that apply here:
American Opportunity Credit
The American Opportunity Credit gives you tax deductions of up to $2,500 for each eligible student (100% of the first $2,000 in qualified expenses and 25% of the next $2,000, for a total of $2,500). Here are the caveats:
- It covers just the first four years
- College or vocational schools only
- The student(s) must be pursuing a degree or a credential
- Student(s) must be taking classes on a “half-time” basis or more
- No felony drug convictions for the student(s)
- The adjusted gross income of the taxpayer must be $80,000 or less for single taxpayers or $160,000 for married filing jointly. If your income is greater than this, you can still receive a partial credit, but it phases out at $90,000 for single filers and $180,000 for joint filers.
Here’s a major plus: You might even get money back if the credit is larger than the tax you owe.
If you have no tax liability after applying the credit, then up to $1,000 of the credit that remains can be given to you in a refund check or deposit into your bank account.
This credit offsets the cost of tuition, fees required as a part of enrollment, as well as course-related books, supplies, and equipment, even if they are not paid directly to the educational institution. (A computer may or may not be deductible, depending on whether it is a requirement of enrollment or a class you/your student is taking).
Remember to keep your receipts!
Also, it’s helpful to keep in mind what doesn’t qualify for the credit.
That is: room and board, transportation, insurance, medical expenses, and fees that are not required in order to enroll and attend the school.
You also can’t “double dip” – in other words, you can’t use the same expenditure toward this credit if has been claimed as a deduction elsewhere on your tax return.
The great thing about this credit is that it is per student (great for parents who have more than one child in college at a time), and it adds up to a $10,000 credit over the course of four years per student.
Lifetime Learning Credit
The lifetime learning credit can be used toward other types of continuing education, whether you or the student is pursuing a degree or certification or not.
Here are the particulars:
- The credit is up to $2,000 per tax return a year (not per student)
- All years of college or other postsecondary education are included, such as courses taken to improve your job skills or to learn new ones
- It’s available to single taxpayers with incomes up to $55,000 for $110,000 for those who are married filing jointly. Partial credit is given up to $65,000 for singles and $130,000 for married couples filing a joint return.
What’s the downside of this credit? You can only deduct 20% of your qualifying expenses. In other words, you’ll have to spend $10,000 in a single tax year in order to get the full value.
Can I Get Both the American Opportunity Credit and the Lifetime Learning Credit?
You cannot claim both credits for the same student. However, you can claim an American Opportunity Credit for one student and the Lifetime Learning Credit for another, depending on your needs.
There is also a deduction you can take up to $4,000 of qualifying tuition and fee expenses from your income. You can claim it for as many years as needed.
However, again, you can’t take this in addition to the American Opportunity Credit and the Lifetime Learning Credit.
An Enrolled Agent (EA) can walk through your options with you, ensuring that you get the maximum credit or deduction possible.
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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as an Enrolled Agent and a Certified Tax Resolution Specialist.
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