There is no denying that college tuition and related costs are expensive. Whether or not you’ve saved to offset the expense or are using student loans to pay for higher education, there are tax credits and deductions available that will help reduce the sting. For the most part, college students can be claimed as dependents, but they can still file for a refund. Even if the credit reduces tax owed to less than zero, you may be eligible for a refund.
There are two education credits available in addition to deducting education expenses: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The rules for each of these vary, but they both have three eligibility requirements in order to take the credit.
First, you, your dependent, or a third party pays qualified education expenses. These expenses can include tuition, fees, and other related student expenses that are required for enrollment at an eligible educational institution. That brings up the second requirement: eligible educational institution. The IRS defines an eligible educational institution as: “a school offering higher education beyond high school. It is any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Dept. of Education.” The good news is that most accredited higher education institutions qualify. The third common qualifier is that the eligible student must be you, your spouse, or a dependent that you list on your tax return.
American Opportunity Tax Credit
The AOTC provides a maximum credit of $2,500 annually per eligible student. It’s a dollar-for-dollar reduction of your taxes owed. Additionally, if the applying this credit reduces your tax liability to less than zero, “you can have 40 percent of any remaining amount of the credit (up to $1000) refunded to you” according to the IRS. Plus, you may be able to claim this credit for each qualified student (you, your spouse, and/or dependent(s)) on your tax return.
In addition to the eligibility requirements covered above, the AOTC has additional eligibility requirements. The IRS states that the student must be pursuing a degree or other recognized credential and be enrolled at least half time for at least one academic period beginning in the tax year. Additionally, the student may not:
- Have completed the first four years of higher education at the beginning of the tax year.
- Have claimed the AOTC (or the former Hope credit) for more than four tax years.
- Have a felony drug conviction at the end of the tax year.
There are also income limits that may prevent you from taking the full credit. If your modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less if filing jointly), you may take the full $2,500 credit. If your MAGI is more than $80,000 but less than $90,000 ($180,000 if filing jointly), the amount of the credit will be reduced. If your MAGI is more than $90,000 ($180,000 if filing jointly), you may not take the credit at all.
Lifetime Learning Credit
Unlike the AOTC, there is no limit on the number of years in which you can claim this credit to help offset the cost of higher education, including undergraduate, graduate, and professional degree courses. The maximum LLC is $2,000 per return. However, also unlike the AOTC, this credit is not refundable (i.e. you will not get monies refunded to you if this credit drives your tax liability to less than zero).
The income limits in place to claim this credit are also lower than those set for the AOTC. The MAGI limit for the LLC is $64,000 ($128,000 if filing jointly). Another differentiator is that while you may claim up to $2,500 per student for the AOTC credit, the LLC credit is limited to $2,000 per return.
Tuition and Fees Deduction
Finally, you may also deduct tuition costs and qualified educational fees from your income to reduce your tax liability. You may deduct up to $4,000 from your income per return for qualified expenses. There is no limit to the number of years in which you can take this deduction, and as with the credits, there are income limits (MAGI cannot exceed $80,000 [$160,000 if filing jointly]).
It is important to keep in mind that while a deduction will reduce your overall income, it does not carry the dollar-for-dollar tax reduction that either of the credits will. That said, you may be able to claim all three on a single tax return, but they may not cover the same student or the same educational expense. Get the IRS overview of Education Credits and Tuition Deduction Comparison.
With the extraordinary expense of higher education and complexities of the available tax credits and deductions (for example: who should claim the credit – parent or student?), we strongly encourage you to contact us for help to weed through all available opportunities to lower your tax bill! With April 15th approaching, schedule your tax appointment now.
