Tax Credits For Education

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

The federal government’s social programs to help needy students pay for college tuition and costs basically first started with the passage of the Servicemen’s Readjustment Act of 1944, commonly known as the GI Bill. When the Soviet Union launched Sputnik, Congress passed the National Defense Education Act in 1958. Several continuing student aid programs were added to the books in 1965 with the Higher Education Act, followed in 1972 by the Pell Grant (a need-based program). Then came college work-study, and federal subsidized and unsubsidized loan programs. In the late 1970s, tuitions rose disproportionately vs. inflation, college enrollment significantly increased, and middle-income families began relying on the federal student aid programs to help with college costs. As families went into debt for their children’s college, the federal student loan limits were raised, but the burden to pay back these loans weighed heavy on a graduate’s future earnings.

In 1997, President Clinton signed the Lifetime Learning credit and the Hope credit into law. The Hope credit was modified to become the American Opportunity Credit for the period of 2009 through 2012 (unless extended). This was the first time Congress used the tax code to help middle-income taxpayers in addition to the loans.

The Tax Credits: The American Opportunity Credit and the Lifetime Learning Credit

These are for post-secondary tuition and fees for the taxpayer, their spouse, or their dependent. The credit is allowed to the individual claiming the student as a dependent, even if the tuition is paid by the student or someone else. (The student can claim the credit If not claimed as a dependent. If your income exceeds the limitation, consider this strategy.)

Only one of the credits can be claimed in a single tax year for that student..  For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs. However, if you have two children in college (good luck), you can choose a different credit for each.

Here are some key facts you should know about these valuable education credits:

• American Opportunity Credit (expires as of December 31)
• Maximum Credit: The Maximum credit is $2,500 per eligible student. If you pay $4,000 or more in qualified expenses, the credit is $2,500 per eligible student. If you don’t pay this much, the credit is less (… but you can make enough to retire if you write a book and let the rest of us know how you did it.)
• Income Limitation: The full credit is only available if you make less than $80,000 ($160,000 on a joint return). You are then considered rich, and the phaseout begins. You do not qualify if you are married filing separately.
• In Your Pocket: Forty percent of the credit is refundable, which means that a claimant may be able to receive up to $1,000, even if they owe no taxes. (Subject to other conditions.)
• Years Available: It is available ONLY for the first four years of post-secondary education – no matter the student’s age.
• Degree: The student must be pursuing an undergraduate degree or other recognized educational credential.
• Number of Courses: The student must be enrolled at least half-time for at least one academic period.
• Qualified Expenses: Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• Felony Drug Conviction: A student can have NO felony drug conviction on his records.
• Payments: Payments made in the first three months of the following tax year are considered made in the current tax year.

Lifetime Learning Credit

• Maximum Credit: The credit can be up to $2,000 per eligible student.
• Income Limitation: The full credit is only available if you make less than $60,000 ($120,000 on a joint return. You do not qualify if you are married filing separately.
• In Your Pocket: The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
• Years Available: It is available for all years of post-secondary education and for courses to acquire or improve job skills.
• Degree: The student does not need to be pursuing a degree or other recognized education credential.
• Number of Courses: Available for one or more courses.
• Qualified Expenses: Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• Felony Drug Conviction: Not considered. (Cannot be in jail.)
• Payments: Payments made in the first three months of the following tax year are considered made in the current tax year.

There is also an above-the-line tuition and fees tax deduction available, but you cannot claim the tuition and fees tax deduction in the same year the American Opportunity Tax Credit or the Lifetime Learning Credit is claimed.  Prepare your tax return using the different methods to see which is more beneficial for you. Generally, the credits provide the greater benefit as they are a dollar for dollar reduction against tax.

And please don’t forget, if you received a tax-free educational assistance or refund after filing your return, you must repay all or part of the credit in the year you received the assistance or refund. The same is true if courses were dropped and you received a refund.

Check out IRS Publication 970, or call this office, if you have any questions related to education credits.

Have a good week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.