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.
Unless Congress extends it, the American Opportunity Tax Credit (AOTC) expires at the end of 2012, leaving only the Hope and Lifetime Learning credit for 2013 and subsequent years.
Where the AOTC provides a credit of up to $2,500 for qualified tuition and other related expenses for each qualifying student, the Hope credit maxes out at $1,950 (2013) and is only available for the first two years of post-secondary education. Up to 40% for the AOTC is refundable, while the Hope credit can only be used to offset tax liability, and any excess is lost. Both credits are phased out for higher-income taxpayers, although the Hope credit is completely phased out at $63,000 for single individuals ($127,000 for joint filers) in 2013, where the AOTC is phased out at much higher incomes ($90,000 for unmarried individuals and $180,000 for joint filers).
If the AOTC is not extended and the student(s) do not qualify for the Hope Credit, their tuition can still qualify for the Lifetime Learning credit, which is equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. Unlike the Hope or AOTC, the Lifetime credit is calculated on a per-family basis, with a maximum annual credit of $2,000.
As a hedge against the loss of the AOTC, taxpayers can pre-pay qualified tuition and related expenses for an academic period that begins during the first three months of 2013 and claim them as expenses paid for purposes of calculating the AOTC in 2012. Care should be taken only to pre-pay enough of the expenses to maximize the credit in 2012 and preserve the remainder for 2013 in case the AOTC is extended or for computing the Hope or Lifetime Learning Credit in 2013.
If you would like discuss prepaying expenses to maximize the AOTC for 2012 or if you have questions related to education credits and deductions, please give this office a call.
Where the AOTC provides a credit of up to $2,500 for qualified tuition and other related expenses for each qualifying student, the Hope credit maxes out at $1,950 (2013) and is only available for the first two years of post-secondary education. Up to 40% for the AOTC is refundable, while the Hope credit can only be used to offset tax liability, and any excess is lost. Both credits are phased out for higher-income taxpayers, although the Hope credit is completely phased out at $63,000 for single individuals ($127,000 for joint filers) in 2013, where the AOTC is phased out at much higher incomes ($90,000 for unmarried individuals and $180,000 for joint filers).
If the AOTC is not extended and the student(s) do not qualify for the Hope Credit, their tuition can still qualify for the Lifetime Learning credit, which is equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. Unlike the Hope or AOTC, the Lifetime credit is calculated on a per-family basis, with a maximum annual credit of $2,000.
As a hedge against the loss of the AOTC, taxpayers can pre-pay qualified tuition and related expenses for an academic period that begins during the first three months of 2013 and claim them as expenses paid for purposes of calculating the AOTC in 2012. Care should be taken only to pre-pay enough of the expenses to maximize the credit in 2012 and preserve the remainder for 2013 in case the AOTC is extended or for computing the Hope or Lifetime Learning Credit in 2013.
If you would like discuss prepaying expenses to maximize the AOTC for 2012 or if you have questions related to education credits and deductions, please give this office a call.