Parents and students should see if they qualify for either of two college tax credits or any other tax benefits related to education expenses, the IRS reminded filers today.
The so-called American opportunity tax credit is the most popular and beneficial of the tax breaks tied to tuition and other college expenses. But there is also the lifetime learning credit.
There are also various deductions available for those who pay qualifying expenses for an eligible student. Eligible students include the primary taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.
The “fiscal cliff” legislation enacted Jan. 2, 2013 extended the American opportunity tax credit for another five years until the end of 2017.
The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013.
The lifetime learning credit did not need to be extended because it was already a permanent part of the tax code.
For those eligible, including most undergraduate students, the American opportunity tax credit will provide the greatest tax savings. The lifetime learning credit should be considered by part-time students and those attending graduate school. For those who don’t qualify for either credit, the tuition and fees deduction may be the right choice, the IRS said.
All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. None of them can be claimed by a nonresident alien or married person filing a separate return. In most cases, dependents cannot claim these education benefits.
Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year.
This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax benefits. Taxpayers should see the instructions to Forms 8863 and 8917, and Publication 970 for details on properly figuring allowable tax benefits.
Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Here are some key features of the credit:
- The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify. Any student with a felony drug conviction also does not qualify.
- Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.
- The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
- Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student. Other education-related credits and deductions do not provide a benefit to people who owe no tax.