If you, your spouse, or a dependent on your tax return is currently attending school, you may be eligible for an education tax credit. The two tax credits that may be available are the American Opportunity Credit and the Lifetime Learning Credit.
These credits can be used on your federal tax return to help offset the financial burden of attaining a higher education.
Expenses such as tuition, books, and student activity fees may be eligible for one of the following credits or deductions:
The American Opportunity Credit provides an annual maximum of $2,500 per student. The credit is derived from 100% of the first $2,000 in eligible expenses and 25% of the next $2,000 in eligible expenses. To be eligible for the American Opportunity Credit, the student must be enrolled at least half-time, enrolled in a program that leads to a degree, and must not have completed the first four years of post-secondary education.
The Lifetime Learning Credit provides an annual maximum of $2,000 per taxpayer. The credit is calculated by taking 20% of eligible expenses up to $10,000. Unlike the American Opportunity Credit, the Lifetime Learning Credit has no requirements for number of credits being taken, degree seeking status, or number of years that the student has been in school. The Lifetime Learning Credit can also be used for graduate and professional degree seeking students which the American Opportunity Credit doesn’t qualify for.
Additionally, if you do not qualify for either of these tax credits, you may be eligible for the Tuition and Fees Deduction. This deduction allows you to deduct your qualified higher education costs from your modified adjusted gross income effectively lowering your taxable income by up to $4,000. Since this deduction is taken as an adjustment to income, you are still able to claim it even you don’t file a Schedule A for itemized deductions.
Each credit or deduction is also subject to phase-out limits. This means that you may not be allowed to take a credit or deduction if your income is above a certain threshold. This threshold varies depending on your filing status.
We suggest discussing your education expenses with your tax preparer so they can help determine the optimal credit/deduction for you.
By: John Mellstead
Please feel free to contact us at BHT&D CPA’s with any of your education related tax questions. Call (616) 642-9467 or request a complimentary accounting consultation.
Photo by: Margan Zajdowicz