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Tax Credits for College: Federal Tax Credits and Deductions

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Parents and families may qualify for a number of tax breaks and incentives to help ease the burden of rising college tuition costs and expenses. Both parents and students can qualify for these federal programs and incentives. The main incentives are Tax Credits (Education Credits) and Tax Deductions.

Tax Credits (Education Credits)

provide dollar-for-dollar reductions on your tax bill for tuition and educational expenses up to $2500 per student per year for up to 4 years. Both parents and students can apply for tax credits.

Parents’ income must meet qualifying MAGI Guidelines. For 2017, the MAGI (Modified Adjusted Gross Income) for one parent must not be more than $90,000 or must not exceed $180,000 for two parents who are joint-filing.

Some tax credits are refundable which means that students can receive refunds even if they did not earn an income during the year or owe taxes. Students can receive 40% of the value of the credit up to $1000 even if the student did not earn any income.

What are the different tax credits available to parents and students?

There are few different tax credits available including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC):

What is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit (AOTC) is a tax credit up to $2500 per student per year for tuition, fees books, supplies and other eligible educational expenses during the first 4 years of college. A computer may be considered an eligible expense if it is required by your institution.

*Housing, living expenses, medical insurance and transportation are NOT considered eligible expenses.

To Qualify for the AOTC:

  • Student must be enrolled in a program leading towards a degree, certificate or  other recognized post-secondary education credential. For a list of accredited schools and programs, visit: https://ope.ed.gov/accreditation/
  • Student must be enrolled at least part-time
  • Student must not have had any felony drug convictions

Note: In order to receive credit, the expenses paid during a taxable year must relate to an academic period that begins in the same taxable year or an academic period that begins in the first three months of the following taxable year.

What tax form/s are used to apply for the American Opportunity Tax Credit?

Form 8863 will need to be completed and attached to either Form 1040 or 1040A and submitted to the IRS.

 

What is form 1098-T?

Educational institutions are required to fill out form 1098-T, also known as a tuition statement and submit it to the IRS (Internal Revenue Service). They are required to complete and submit this form for each enrolled student who has had any reportable transactions with the institution. Reportable transactions include any payments received by the institution, refunds given or any billing transactions for education and education-related expenses. Educational institutions must provide students with a copy of the completed 1098-T submitted to the IRS on their behalf.

 

Tips for receiving the American Opportunity Tax Credit (AOTC):

  • Know the IRS rules to avoid losing your credit. For example, expenses cannot be applied to both an education tax credit and a withdrawal from a 529 savings account.
  • Keep good records. This includes keeping all receipts and proof of transactions from your educational institution.
  • Make sure to include your school’s identification number when filling out form 8863 on your return. This will avoid any long and unnecessary delays or complications.
  • Make sure you meet all eligibility criteria.
  • You cannot qualify for double benefits. This means you will not qualify for the AOTC if you or someone else has claimed or deducted another higher education benefit using the same student or same expenses.

 

The Second Education Credit being offered by the Federal Government is the Lifetime Learning Credit.

 

What is the Lifetime Learning Credit?

The Lifetime Learning Credit is an education credit worth up to $2000 per tax return. The amount of the LLC is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2000 per return. The Lifetime Learning Credit has no max on the number of years you can claim it. It can be claimed for undergraduate, graduate and professional level degree courses and includes courses that may contribute to improving job skills and employability.

Who is eligible for a Lifetime Learning Credit?

Students are eligible if they have met all of the qualifications to apply for a Lifetime Learning Credit (LLC). A student must:

  • Have qualified tuition and/or related expenses at an eligible educational institution of higher learning.
  • Be enrolled or taking courses toward an undergraduate, graduate or professional degree program or courses that will improve job skills.
  • Be enrolled for at least one academic period in the tax year.
  • Meet income eligibility and requirements.

 

To find out if your educational institution is eligible, you can visit: https://ope.ed.gov/accreditation/ for a list of approved schools.

What are the income requirements to apply for a Lifetime Learning Credit?

To claim the full credit, your MAGI, modified adjusted gross income must be $65,000 or less or $131,000 or less if you are married and filing jointly.

If your MAGI is between $55,000 and $65,000 (between $111,000 but less than $131,000 for married filing jointly), you receive a reduced amount of the credit.

If your MAGI is over $65,000 ($130,000 for joint filers), you cannot claim the credit.

 

How do I apply for the Lifetime Learning Credit?

To claim the LLC, you will need to fill out form 8868 and attach it to Form 1040 or 1040A.

Each student should receive a tuition statement or Form 1098-T from their school by January 31st. It will help determine the tax credit for the year. If a student has not received Form 1098-T, contact your educational institution for more information.

 

Education Tax Deductions

Other than the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit, there are some Education Deductions that can be applied to offer tax relief.

Student Loan Interest Reduction – a deduction that allows you to claim dollar-for-dollar amount of interest paid on your student loans up to $2500 or 25% percent of your adjusted gross income, whichever is less.

Work-Related Education Deduction – If you were required by your employer to take additional training or advance your education, you may qualify for a Work-Related Education Deduction.

For more information on Education Reductions, visit: https://www.irs.gov/newsroom/tax-benefits-for-education-information-center

 

Additional Resources:

 

IRS Website with additional information on Education Tax Credits https://www.irs.gov/credits-deductions/individuals/education-credits-aotc-llc

 

IRS Help with Filing Form 8863

https://www.irs.gov/forms-pubs/about-form-8863

 

American Opportunity Credit At a Glance (En Espanol)

https://www.irs.gov/es/spanish/american-opportunity-tax-credit-at-a-glance

 

Tax Scams/Consumer Alerts – Advice and tips on how to avoid tax scams

https://www.irs.gov/newsroom/tax-scams-consumer-alerts