Paying for college is a challenge for many American families.
The average undergraduate in-state tuition plus required fees at a public four-year college was $8, 804 for the 2016 to 2017 school year, according to the U. S. Department of Education’s National Center for Education Statistics. Room and board bump the total expenses to $19, 488. And if you’re considering a private four-year institution rather than a public school, you can expect your costs to more than double.
But there are ways for students and their families to ease the financial burden of higher education. The federal government offers two education tax credits to help recoup some of the expenses at tax time, if you’re eligible.
Taxpayers can claim either tax break for their own expenses, the expenses of a spouse or the expenses of a dependent listed on their federal tax returns. Here’s some information about the valuable tax credits and five common mistakes to avoid when claiming them.
What education credits are available?
American opportunity tax credit
The American opportunity tax credit can help a student or parents recover part of the college tuition, required fees and costs of course materials paid to an eligible educational institution during the tax year. This credit on your tax return helps offset 100% of the first $2, 000 of qualified education expenses and 25% of the next $2, 000 of those expenses, or $500. So you can claim a maximum of $2, 500 per eligible student, depending on your filing status and modified adjusted gross income.
The AOTC is refundable, which means if it brings the amount of income tax you owe to $0, you can get up to 40% of the remaining amount of the credit (up to $1, 000) back as a tax refund.
To be eligible to claim the AOTC, the student must be enrolled at least half time for one academic period beginning in the tax year and fulfill multiple other requirements. The credit is only available for the first four years of undergraduate education. And there are income limits, depending on the claimant’s filing status.
For tax purposes, the IRS considers an eligible education institution to be typically any accredited public, private or nonprofit vocational school, college, university or college or postsecondary institution entitled to participate in a student aid program run by the Department of Education.
Lifetime learning credit
The lifetime learning credit is another tax credit available to help counter the costs of expenses and related expenses paid to a eligible institution of higher education. Claimants face income limits based on their filing statuses.
Inside some ways, the LLC is far more expansive than the AOTC — it can be used to cover costs for undergraduate, graduate student and professional degree classes. There’s no limit to time taxpayers can state the LLC, and the student need not be enrollment at least half time.
Unlike the AOTC though, the LLC typically can be applied only to tuition and required fees paid immediately to the educational establishment — it can’t be used for course materials, such as books, products and equipment, unless the costs are required to be paid to the institution as part of enrollment or attendance.
Typically the amount of the credit is 20% of the first $10, 000 of qualified education expenses, or a maximum of $2, 000 per tax go back. Unlike the AOTC, the LLC is a nonrefundable tax credit, which means you can only use the credit to minimize your tax liability to $0, but you won’t get any money back if individual owes less tax than the number of credit available.
Frequent mistakes in claiming education and learning breaks
The AOTC and the LLC provide a valuable tax benefit, because they reduce your amount of tax you owe dollar-for-dollar. And in the circumstance of the AOTC, you could even get a refund if the credit is higher than the tax you owe. Nevertheless it’s important to watch out for common faults that can arise when claiming these education breaks and learn how to avoid them or package with the aftermath.
just one. Claiming the credits when your income is too high
Both the AOTC and the LLC have income limits, so if your income is more than the thresholds, you cannot take good thing about the breaks.
To say the full AOTC, your modified adjusted low income, or MAGI, must be no more than $80, 000 as an individual ($160, 000 or less if married processing jointly). If the MAGI is more than $80, 1000 but less than $90, 000 (more than $160, 000 but less than $180, 000 for a the wife and hubby filing jointly), you may obtain a partial credit. If your MAGI is $90, 000 or maybe more ($180, 000 or more as a married couple processing jointly), you can’t state the credit.
For the LLC, the full credit is available only to an individual taxpayer with a MAGI of $57, 000 or less ($114, 000 or less if married and filing a joint return). An incomplete credit is available for people with MAGI of between $57, 000 and $67, 000 (between $114, 1000 and $134, 000 if married filing jointly). Above those upper limits ($67, 000 for single filers and $134, 000 for those married filing jointly), no credit is available.