With summer ending, many of us are now back in school. For students who are heading off to a college or university, this transition can take a lot of preparation. Whether you’re a parent or a student yourself, you may be wondering what tax breaks are out there for those who incur out-of-pocket costs for postsecondary education.
Good news! The IRS allows taxpayers to claim two types of education credits on their personal income tax return, which may reduce the amount of tax owed. Although both credits apply to costs for postsecondary education, such as tuition for college or trade schools, they each have some unique rules.
The American Opportunity Tax Credit
The first is the American Opportunity Tax Credit (AOTC), worth up to a maximum annual credit of $2,500 (per eligible student) for qualified educational expenses paid for the first four years of higher education. The student must be pursuing a degree or other recognized education credential and be enrolled at least half time for at least one academic period beginning in the tax year. This credit is partially refundable, meaning if the credit brings the amount of tax you owe to zero, you can get a portion of the remaining credit (up to $1,000) refunded to you.
The Lifetime Learning Credit
The second credit available is known as the Lifetime Learning Credit (LLC), worth up to a credit of $2,000 per tax return for qualified tuition and related expenses. Unlike the AOTC, the LLC does not have a limit on the number of years you can claim it. It is available for all post-secondary education, including graduate, professional degree courses, and even courses to acquire or improve job skills.
Am I eligible?
In addition to the eligibility requirements mentioned above, you (or a dependent) will also need a copy of Form 1098-T or Tuition Statement from the college or university to figure your credit. If you’re married, you’ll need to file jointly, as married taxpayers filing separately can’t claim education credits. You can even claim both the AOTC and LLC on the same return, but not for the same student or the same qualified education expenses.
If you can be claimed as a dependent on someone else’s return, you are not eligible for the credit. For students who can still be claimed as a dependent by their parents, the credit will be claimed on your parent’s tax return.
To receive the full amount of the AOTC or LLC, your modified adjusted gross income must be $80,000 or less ($160,000 if married filing jointly). Once your modified adjusted gross income exceeds $90,000 ($180,000 if married filing jointly), you will no longer be able to claim these credits.
Be sure to talk to your tax professional if you think you may be eligible, so you can take advantage of this opportunity! Padgett’s nationwide network of CPAs and EAs are ready to help, so find a location near you today.