Educational Tax Credits

The law currently provides for two tax credits, the American Opportunity and the Lifetime Learning Credits. Both credits will reduce a taxpayer's tax liability dollar for dollar until the tax reaches zero. Any Lifetime credit in excess of the tax liability is lost. The American Opportunity credit provides for a partial excess credit refund.  The credit is not allowed for taxpayers who file married separate returns. The credits are elective and the taxpayer must choose between the two credits for each student.

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.

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