Paying for college is a hurdle for many American families.
According to the Department of Education's National Center for Education Statistics, the average in-state undergraduate tuition plus required tuition at a four-year public university was $8,804 for 2016-2017. Room and board bring the total expense to $19,488. And if you're considering a four-year private institution rather than going to a public school, you can expect the costs to be more.
But there are other ways for students and their families to reduce the financial obligation of higher education. The government offers two education tax credits to help you recoup some of your expenses at tax time if you qualify.
Taxpayers can claim tax relief for their expenses, the expenses of a dependent, or the expenses of a spouse shown on their federal income tax returns. Here is some information on valuable tax credits and common mistakes to avoid when claiming them.
What education credits are available?
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) can help a student or their parents recoup a portion of tuition, required tuition, and course materials paid to a qualifying educational institution during the tax year. This tax return credit helps offset 100% of the first $2,000 of eligible educational expenses and 25% of the next $2,000, or $500. So you are eligible to claim a maximum of $2,500 per qualified student, depending on your MAGI (modified adjusted gross income) and filing status.
The AOTC is refundable, which means that if you reduce the income tax you owe to $0, you can recover up to 40% of the remaining credit amount (up to $1,000) under the form of a tax refund.
To be eligible to apply for the AOTC, a student must be enrolled for at least half of the academic term beginning in the fiscal year and meet numerous other requirements. The AOTC is available for the first four years of university studies. And there are income limits based on the applicant's marital status.
Lifetime learning credit (LLC)
The Lifetime Learning Credit (LLC) is another tax credit available to help offset tuition and related fees paid to a qualifying institution of higher learning. Applicants face income limits depending on their marital status.
In some ways, the lifetime learning credit is more expensive than the AOTC: it can cover the costs of college, higher, and professional education. There is no limit to the number of years taxpayers can apply for the lifetime learning credit, and the student does not need to be enrolled at least half-time.
Unlike the AOTC, however, the lifetime learning credit generally only applies to tuition and compulsory fees paid directly to the educational institution; it cannot be used for educational materials such as supplies, books, and equipment unless costs are paid to the institution as part of registration or attendance.
The credit is 20% of the first $10,000 of eligible educational expenses or up to $2,000 per tax return. Unlike the AOTC, the lifetime learning credit is a non-refundable tax credit, which implies that you can only use the credit to reduce your tax liability to $0. Still, you won't get a refund if you owe less than the amount of credit available.
What counts as a qualifying educational institution?
For tax purposes, the IRS considers a qualifying educational institution to be any vocational school, college, university, public, private, or nonprofit post-secondary institution eligible to participate in a student assistance program administered by the Ministry of Education.
Common mistakes in claiming education credits
Lifetime Learning Credit and American Opportunity Tax Credit (AOTC) provide a valuable tax advantage because they reduce the amount you owe, dollar for dollar. And for AOTC, you can also get a refund if the credit is more than the tax you owe. But it's important to be aware of common mistakes when applying for these student credits and learn how to avoid them. Below are some of the mistakes people make.
1. Claiming the credit when your income is too high
American opportunity tax credits and lifetime learning credits have income limits; therefore, if your income exceeds the limits, you will not be able to take advantage of the credits.
To claim the full AOTC, your Adjusted Gross Income, or MAGI, must not exceed $80,000 as an individual ($160,000 or less if filing jointly). You can get partial credit if your MAGI (modified adjusted gross income) is more than $80,000 but less than $90,000 for single filers and more than $160,000 but less than $180,000 for a married filing jointly. If your MAGI is $90,000 or more for single filers and $180,000 or more for a married couple filing jointly, you will not be able to claim the credit.
For lifetime learning credits, the full credit is only available to a single taxpayer with a MAGI of $58,000 or less ($116,000 or less if filing jointly). Partial credit is available for MAGI taxpayers between $56,000 and $68,000 ($116,000 and $136,000 if filing jointly). Above these limits ($66,000 for single filers and $136,000 for married filers), no credit is available.
2. Double dipping the tax benefits
You cannot file for American opportunity tax credit and lifetime learning credit for the same student in the same tax year. If you received a tax-free scholarship or grant, you must reduce your reported eligible tuition by the value of that scholarship before calculating the credit.
3. A student and a parent both claiming the same credit
If a parent is claiming an education credit for college expenses incurred by a dependent family member, the student cannot claim the education credit on their tax return. Parents and students should coordinate the filing of tax returns to ensure that they do not claim the credit twice for the same expenses.
4. Claiming credit when you don't meet attendance and other requirements
The American opportunity tax credit is only available for the first four years of higher education and only if the student is enrolled at least half-time in a degree program or other recognized qualification. If you have already applied to the AOTC for four years, enrolled less than half the time, or are pursuing studies or simply taking courses to improve your professional skills but not in a higher education program, you may not be able to apply for the AOTC. The lifetime learning credit has fewer restrictions, so consider whether you are eligible to apply.
5. Claim a credit for nonqualified expenses
You can claim either a lifetime learning credit or American opportunity tax credit to offset tuition, fees, and other eligible education-related expenses required for your application. But only AOTC allows you to recoup expenses for books, supplies, and equipment needed for your program of study that is not paid for directly by the school.
What to do if you make a mistake when claiming education credits
It's a good idea to carefully review the rules for each student's credit and ensure you're only applying for the credit you qualify for. If you need help, contact a tax professional.
If the IRS audits you and determines that your AOTC record is incorrect and you do not have evidence to support your claim, you will be required to repay the amount of credit you received with interest. Additionally, you may incur a penalty for accuracy or fraud. You may also be barred from claiming the AOTC for two to 10 years.
So be sure to keep copies of all documents used to determine your eligibility and the amount of education tax credits, especially when applying for the AOTC. And if you realize you made a mistake applying for a student credit, you need to correct your statement as soon as possible.
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