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There are several education credits and deductions available to assist a taxpayer with the burden of paying for college. The American Opportunity Credit, the Lifetime Learning Credit, and the Tuition and Fees Deduction each have a different set of requirements.
The American Opportunity Credit was created under the American Recovery and Reinvestment Act. This credit can be claimed for expenses relating to the first four years of post-secondary education. The student must attend school at least half time and be enrolled in a program that leads to a degree or another recognized credential for at least one academic period during the tax year. Types of expenses that are eligible for this credit are tuition, fees, books, supplies and equipment. Room and board are not eligible expenses for purposes of this credit. The maximum credit available is $2,500, which is computed by taking 100% of the first $2,000 of expenses and 25% of the next $2,000 of expenses. This credit is also partially refundable, which means you could receive a refund up to $1,000. If your adjusted gross income is greater than $90,000 if your filing status is single or $180,000 if you are filing a joint tax return, you will be excluded from taking the credit. This credit is reported on Form 8863.
The Lifetime Learning Credit is another avenue to reduce your income tax liability. This credit is available for all years of post- secondary education. It is not a requirement for the student to be pursuing a degree or to be enrolled as at least a half time student. This means you could be eligible even if you were taking only one course. Tuition and fees required for attendance, including amounts required to be paid to the school for books and supplies, are considered to be eligible expenses for purposes of this credit. The maximum lifetime learning credit available per return is $2,000, which is calculated as 20% of the first $10,000 of expenses that were paid for the year. This credit is non -refundable, which means you cannot get a refund if you do not have any tax liability. If your filing status is single, the income limit for taking advantage of this credit is $61,000; the income limit if you are filing jointly is $122,000. This credit is also reported on Form 8863.
In the event that you do not qualify for one of the tax credits, you may be eligible to take advantage of the Tuition and Fees Deduction (Form 8917). The maximum deduction that may be available to you is $4,000. The requirements are similar to that of the Lifetime Learning Credit, however the income phase out levels are higher- $80,000 for a single filer and $160,000 for a joint filer.
There are two items worth noting. First, a student may only benefit from one credit or deduction per tax year. This means you cannot claim both the American Opportunities Credit and the Lifetime Learning Credit on the same student for the same year. The American Opportunities credit can be claimed if there are multiple dependents that qualify in the same year, up to $2,500 for each. The Lifetime Learning Credit is taken on a per return basis as opposed to a per student basis, so the maximum amount would be $2,000 per return. Secondly, the use of loan proceeds to pay for education expenses does not disqualify you from taking advantage of the credits. Use the expenses to figure the credit or deduction in the year the expenses are paid and not in the year the loan is repaid.
The topic of tax benefits for educational expenses is complex, but one that is definitely worth exploring and taking advantage of. Refer to IRS Publication 970 Tax Benefits for Education for a more in-depth explanation of the rules.
Shana R. Kennedy, CPA is affiliated with Baer And Company, CPAs. Questions or comments can be directed to Shana at Shana@BaerAndCompanyCPAs.com
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