04 Sep Claiming Education Tax Credits on Your Return
Whether you are yourself a student or you are paying the education costs of a spouse or child, paying for a post-secondary education can be expensive. However, the government offers two different tax credits for college students to help reduce some of the financial burden. These credits are the American Opportunity credit and the Lifetime Learning credit.
Claiming these credits and understanding how much you can receive is rather complicated, and we strongly recommend that you work with a Provo tax preparer to ensure it is done correctly. However, here is a basic overview of the two tax credits, so you have a general idea of what to expect when claiming either of these education tax credits.
The American Opportunity Credit
The American Opportunity credit replaced the Hope Scholarship credit in 2009 and offers a more generous benefit to those who qualify. This credit covers 100% of a student’s first $2,000 in education expenses, and 25% of the next $2,000 for a maximum annual credit of $2,500. You can claim this credit for up to three students in your family—whether that be your children, yourself, or your spouse—for a maximum annual credit of $7,500 per family.
This credit can only be claimed for students in their first four years of postsecondary education, and they must carry at least a half-time course load for at least one full semester in that calendar year. They must also be enrolled in a program that leads to a bachelor’s or associate’s degree, or another recognized credential.
The American Opportunity credit can be used to cover any mandatory enrollment fees, including tuition and the cost of books and other course materials. Room and board, and other optional fees, cannot be used to claim this credit. It can be used at nearly all accredited postsecondary schools, including many trade schools. To ensure that your student’s school is eligible, visit fafsa.gov and verify the school has a Federal School Code.
If your modified adjust gross income exceeds certain levels, you may not qualify for this credit, even if you meet the other qualifications listed above. You also are not eligible if you use the married filing separate status on your return. Be sure to talk to your accountant in Provo to see if you can qualify for this credit.
If you qualify for the American Opportunity credit, up to 40% of the amount you receive is refundable. For example, let’s assume you qualify for the full $2,500 for your education expenses this year. This makes the refundable portion $1,000. If you don’t owe any taxes, you’ll be refunded $1,000 for this credit.
If you owe an amount up to $1,500, the non-refundable portion of your American Opportunity credit would cover your tax bill, and you would still receive $1,000. If you owed $2,000 in taxes, the non-refundable portion of the credit would be applied, as well as $500 from the refundable portion to reduce your tax bill to $0. You would then receive the remaining $500 in a refund.
The Lifetime Learning Credit
The Lifetime Learning credit covers 20% of up to $10,000 in qualified education expenses, making the maximum credit $2,000 before phase-outs. Unlike the American Opportunity credit, this credit can be applied to students who are carrying a limited course load, or who have already completed four years of postsecondary schooling—meaning this credit can apply to graduate school, as well as to courses taken to improve job skills.
As with the American Opportunity credit, this credit can be applied to education expenses for any student that you claim as a dependent, including yourself. However, the maximum credit is still $2,000 regardless of how many students you have.
Aside from the differences mentioned above, the qualifications for both education credits are rather similar: Qualified expenses include tuition and materials, if those materials are purchased from the school. If your MAGI exceeds certain levels, the credit is phased out—however, the phase-out levels are much lower for this credit.
Claiming These Credits
When claiming education credits, the most important thing to know is that you cannot claim both credits for one student in the same year. So, if you or your student qualifies for both credits, it’s important to determine which credit will offer you the most benefit. The tax preparers here at The Accounting Guys can help with that. Contact us to speak to a Provo tax preparer and get expert help with preparing your next tax return.