On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
Another added complexity: For purposes of claiming education credits, taxpayers can choose not to claim dependency exemptions for their student children. Then the student can claim the education credit on his/her own return. This could be beneficial, for example, if the parents have a gross income too high to actually get a tax break from the credit. A BIG drawback to this approach: Neither the student nor the parents can claim a dependency exemption for the student.
On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
AMERICAN OPPORTUNITY CREDIT
The American Opportunity credit is available for the first four years of post secondary education, and the maximum credit per student is $2,500. The credit is based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year. 40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting. The credit is available for students enrolled on at least a half-time basis.
For higher-income taxpayers, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Annual inflation adjustment does not apply to these amounts.
LIFETIME LEARNING CREDIT
The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying educational expenses for (1) undergraduate, graduate, or certificate level courses for a student attending classes on at least a half-time basis, or (2) any course at an eligible institution to acquire or improve job skills of the student (no attendance time requirements).
For 2016, the allowable credit phases out when a taxpayer’s modified AGI is between $55,000 and $65,000 for single taxpayers and between $111,000 and $131,000 for joint return filers. These phase-out levels are annually adjusted for inflation. Please call this office for the phase-out AGI for other years.
Lifetime Learning Credit Example: A taxpayer, whose AGI is under the phase-out threshold, has two children attending college on a full-time basis. The taxpayer pays qualified tuition expenses for the two children in the amount of $12,500, and there is no reimbursement or other tax benefit claimed for the tuition expense. The taxpayer is entitled to a tax credit of $2,000 (20% of the first $10,000) for the tax year.
Qualifying expenses…for both credits include tuition and fees but generally not expenses for room, board, equipment*,materials*, books* and other nonacademic fees such as student activity, athletic, insurance, etc. Also excluded are expenses for courses that involve sports, games or hobbies that are not part of a degree program. Tax-free scholarships or fellowships and other tax-free educational benefits must reduce expenses qualifying for the credit. *However books and certain other materials that are provided by the school and included in the tuition and fees may also be deductible.
Qualifying students…must attend a qualified educational institution (one that is eligible to participate in U.S. Dept. of Education student aid programs). The student must be the taxpayer, spouse, or someone who is a dependent of the taxpayer. In addition, in the case of the American Opportunity Credit, the student must have no federal or state felony drug convictions for the academic period to which the credit would apply.
Who claims the credit? The taxpayer who claims the Lifetime Learning or American Opportunity credit is not necessarily the one who pays the tuition.