By Jason Watson
Absolutely yes! For those seeking college degrees, parents and students are offered some relief by way of the tax code. Education credits are one of several ways to help curb the costs of higher education. Credits have a significant tax advantage because they reduce your tax liability dollar for dollar versus a mere reduction in your taxable income. In some cases, the credit is refundable even if you owe no tax. More money in your pocket, imagine that!
For example, you can take an educational credit on line 49 of your Form 1040. The directly reduces your taxes, however it cannot reduce your taxes below zero. So it is capped by either a maximum or by the amount computed tax.
A refundable credit, on the other hand, goes on line 66 of your Form 1040. So even if you don’t have any computed tax you still get a portion of your educational credit as a refund. This is important- many students take their own educational credit. This might not be the best idea if you otherwise would not have any computed tax. More on that later in this series.
There are two credits that may be claimed if eligible: the American Opportunity credit or the Lifetime Learning credit.
American Opportunity Credit
The American Opportunity credit provides for a maximum yearly benefit of $2,500 per student in their first four years of post-secondary education. As previously stated, a portion of this credit is refundable; 40% to be exact. In other words, up to $1,000 of this credit could be refunded to you even if you do not have a computed tax. The credit cannot be claimed for more than 4 years and has a few stipulations to be eligible. To qualify the student:
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- Must be pursuing a degree from an eligible educational institution.
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- Must be enrolled at least half time for at least one academic period (semester, quarter, or summer session). A full-time student must be enrolled at a school for the number of hours or classes that the school considered full time. In addition, the student must have been a full-time student for some part of 5 calendar months during the year (not necessarily consecutive).
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- Must be pursuing an undergraduate degree, certificate, or other recognized credential.
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- Must not have a felony drug conviction.
- Must have qualified education expenses.
Qualified education expenses for this credit include amounts paid for books, supplies, and equipment that are needed for a course regardless if they are purchased from the institution as a condition of enrollment.
Lifetime Learning Credit
The Lifetime Learning Credit offers an alternate tax savings on higher education and is far less restrictive than the American Opportunity Credit. If eligible, the Lifetime Learning Credit provides a yearly benefit of 20% of qualified education expenses up to a maximum of $10,000 per tax return. That’s a maximum of $2,000 (20% of $10,000) for all eligible students and their combined qualified education expenses if taking this credit. To qualify the student:
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- Must be taking courses from an eligible educational institution.
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- Must be enrolled for at least one academic period (semester, quarter, or summer session).
- Must have qualified education expenses
Less restrictions translates into tax savings for those who are: taking only one class, taking courses to improve job skills, who are not seeking a degree, or who are pursuing a graduate degree.
That means you need only take one course, can be working on your graduate degree, and have unlimited years in which the credit can be taken! Unfortunately, this credit doesn’t offer money back if your computed tax is already zero because it’s considered nonrefundable (bummer).
Qualified education expenses for this credit include only amounts paid for books, supplies, and equipment that are needed for a course that are required to be paid to the institution as a condition of enrollment. This is looser than the American Opportunity Act.
One last thing worth mentioning, if your income reaches certain levels, these credits are reduced or eliminated entirely. For the American Opportunity credit your income must not exceed $90,000 (single) or $180,000 (married filing jointly). For the Lifetime Learning credit, your income must not exceed $62,000 (single) or $124,000 (married filing jointly). And for your garden variety tuition and fees deductions (Form 8917, line 34 on Form 1040), income must not exceed $87,850 for single and $109,250 for married filing jointly taxpayers.
Income Limits
| Single Filers | Married Filing Joint | |
| American Opportunity | <$90,000 | <$180,000 |
| Lifetime Learning | <$62,000 | <$124,000 |
| General Tuition, Expenses | <$80,000 | <$160,000 |
| Student Interest Deduction | <$75,000 | <$155,000 |
| Coverdell Contributions | <$110,00 | <$220,000 |
| Savings Bonds Redemption | <$87,850 | <$109,250 |
Because of these income limits, parents need to be careful. If the parent attempts to take the deduction, you might be phased out due to income. So, in that case it might be better for the student to take the credit. Planning is important here. And the right tax preparation can yield a lot of money for the “family”. How it is duked out at Thanksgiving is beyond our expertise, but take the money.. some way some how!
Also, note that filing married separate kills most education deductions, credits, etc.