As you are dropping Junior off at college and paying that large bill for tuition and fees, a bit of relief may be coming your way in the form of Education Credits.
There are two credits for which you may qualify: American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC).
The AOTC is the more desirable of the two. A credit of up to $2,500 per student may be subtracted from your tax bill. Up to $400 can be refundable (meaning you can get $400 back even if you have no tax). In exchange, the credit is very restrictive. Junior must be attending an accredited school pursuing a degree or similar and at least a half-time student. This credit can only be taken during the first four years of attendance. It is aimed at undergraduate students.
The LLC doesn’t have many restrictions – Junior only needs to attend a class after high school and the cost can be taken as a credit. The credit can be taken by undergraduate, graduate and non-degree students and there is no limit on the number of years during which it may be claimed. Up to $2,000 qualified educational expenses may be taken as a credit, reducing taxes on a tax return.
Both credits may be taken by either Junior or his parents, depending on whether Junior is being claimed as a dependent. It does not matter who paid the educational expenses, the credits are taken by whoever takes the exemption. The expenses still qualify if they were paid by student loans. The IRS has an interactive tool that can help determine who is a dependent.
While this is good for most people both credits have income restrictions. For AOC if your “modified adjusted gross income” is more than $90,000 ($180,000 married filing jointly [MFJ]) or $57,000 ($114,000 MFJ), the credit is reduced and is zero with an additional $10,000 of income. In some instances Junior might be able to claim the credit instead of his parents.
With the cost of college constantly on the rise, education breaks can at least partly help to offset some of the expenses. Before next tax time is here, parents and students should have a talk to plan who should claim the education tax breaks. This depends on income, filing status and support. Or visit a tax advisor who can help determine the way to get the most out of the cost of education.
The above information is provided for general educational purposes only and may not reflect changes in tax laws. Before taking any action based on this information, consult with your tax advisor about your specific situation.