College Tax Credits for 2015 and Years Ahead

Ah, school days. With each new school year comes new excitement (or perhaps butterflies) for students, and new expenses for Mom and Dad. With this school year off to a great start, now is the best time to check if you or your kids qualify for either of two college tax credits or other education-related tax benefits to help your family save when it comes time to file those 2015 federal income tax returns. Here’s the low-down.

Two Major Credits

Generally, either the American Opportunity Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse, and dependents (including college, university, or vocational school students at nonprofit or for-profit institutions). The American Opportunity Tax Credit will provide a credit for each eligible student (a wise option for households with multiple students), while the Lifetime Learning Credit provides a maximum credit per tax return. It’s important to note that you may only claim one of these credits per student, per year – even if you qualify for both. 

In order to claim these credits on your return, you must file Form 1040 or 1040A and complete Form 8863, Education Credits. To determine your eligibility, be sure to check out the Education Credits web page or use the IRS’s Interactive Tax Assistant tool. 

Typically, a student will receive a Form 1098-T from their school by January 31st. This form will detail information about tuition and expenses paid or billed. Amounts on these forms will likely differ from those you are eligible to claim for tax credits, however, so be sure to check instructions on Form 8863 and Publication 970 for details on properly figuring your allowable benefits. 

The American Opportunity Tax Credit

Many individuals eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student – a big savings for families with multiple students! Students are able to claim this credit for qualified education expenses paid during the entire tax year for a certain number of years, but be sure to bear in mind the following: 

• The credit is only available for up to four tax years per student – so claim it while you can
• The credit is available only if the student hasn’t completed the first four years of post-secondary education before 2015 (for this upcoming tax season) 

A few other tips to consider: 

• Qualified education expenses are amounts paid for tuition, fees, and other related expenses. Other expenses, such as room and board, are not qualified. See irs.gov for details. 
• 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 may be available to those individuals who pay $4,000 or more in qualified expenses for an eligible student. 
• 40% of this credit is refundable! This means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. 
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 for married couples filing jointly. The credit is then phased out for individuals with incomes above these levels. 

The Lifetime Learning Credit

This credit of up to $2,000 is available for both graduates and undergraduates, and unlike the American Opportunity Tax Credit, its limit applies to each tax return, rather than to each student. The Lifetime Learning Credit does not provide a benefit to individuals who owe no tax. 

Though the half-time student requirement does not apply to this credit, the student’s course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. 

Other features to note: 

• Tuition and fees required for enrollment or attendance qualify as do any other required expenses.
• The credit equals 20% of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying fees.
• Income limits are lower than the American Opportunity Tax Credit. For 2015, the full credit can be claimed by individuals whose MAGI is $55,000 or less, or $110,000 for married couples filing jointly. 

Other Education-related Tax Benefits

• Scholarship and fellowship grants
• Student loan interest deduction of up to $2,500 per year
• Savings bonds used to pay for college
• Qualified tuition programs, also known as 529 plans 

Check out irs.gov for more information on how to save! 

When it comes to saving on education expenses, even a little bit can go a long way. If you’re feeling a little lost on how to help your family save, remember – we are always here to help! Be sure to browse our services page and fill out the form for a free consultation. Or give us a call at 844-841-9857!