Tax Credits lesson, we will review the differences between the two major education tax credits, as well as discuss how to qualify for and choose the credits which will result in the smallest possible tax bill.
Education Tax Credits.
Bob’s daughter, Jane, has graduated from high school and is all set to attend the nearby university in the fall.
Since Jane can still be claim as a dependent and Bob will be paying her tuition, he can take advantage of education tax credits.
These credit, like other tax credit, reduce the amount of Bob’s tax bill and make the cost of an education a bit more affordable.
Let’s take a look at the two education credit that available and see what can be claimed on Bob’s tax return.
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American Opportunity Credit
The American Opportunity Credit allows Bob to claim a yearly tax credit of up to $2,500 for each child’s college tuition and expenses, up to four years.
The credit can usually be claim by anyone who pays the higher education expense of an eligible student who is the taxpayer, spouse, or dependent.
So, with any of the educational tax credits the parent is usually the one to take it.
but if student are not dependent and are paying for their own education, they could claim the credit instead.
The credit allows 100% of the first $2,000 spent on college expense to be claimed, followed by 25% of the next $2,000 in expense.
Qualifies expense include tuition and fees paid directly to the institution for supple, labs, or other equipment that must be paid in order to enroll.
Additionally, the books, supple, and equipment that are required but not purchase directly from the school can also be claim.
For example, if the school requires the student to buy a laptop with certain specification that laptop could be bought anywhere and it would still be a qualify expense.
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To qualify for this credit Jane must be enroll in a program leading to a degree or other credential.
A major limitation is that the credit can only be claimed for the first four years of post-high school education.
The credit cannot be claim if a student has ever been convict of felony drug charge.
Finally, Jane must be enrolled at least half-time in a program that start during that tax year.
The American Opportunity Credit is partially refundable.
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This means that if the amount of the credit plus any other refundable credit or payment to the IRS exceed the tax bill, Bob can receive the overage.
The refundable portion is limited to 40% of the credit.
Like other tax credit, the credit is subject to a Modify Adjust Gross Income (MAGI) phaseout.
The amount that be claim is educ if a taxpayer’s MAGI is between. $80,000 and $90,000 ($160,000 and $180,000, if married filing jointly).
Once a single taxpayer has a MAGI greater than $90,000 or $180,000, if marring filing jointly. the American Opportunity Credit can no longer be claimed.
Lifetime Learning Credit
The Lifetime Leaning Credit offers a tax credit of up to $2,000 per student.
Although not as generous as the American Opportunity Credit. Bob can claim this credit for every year Jane has qualified education expenses.
Additionally, Jane would not have to be enrolled in a program leading. to a degree and only has to take one course to qualify.
Felony drug convictions do not disqualify a student for the credit.
Lifetime Learning Credit
The credit allows Bob to claim 20% of the first $10,000 in qualified expenses.
Qualified expense include tuition and any fees paid directly to the school for books, supple. or lab fees.
So, unlike the American Opportunity Credit. the qualifi fees are only those which are paid directly to the school.
The Lifetime Learning Credit is a nonrefundable tax credit. so any amount in excess of the tax bill doesn’t help out Bob.
Lifetime Learning Credit
The Lifetime Learning Credit has a lower MAGI phaseout than the American Opportunity Credit.
The amount of the credit is reduce between $55,000 and $65,000 ($111,000 and $131,000.
if married filing jointly). Beyond the upper limits, the credit completely phase out.