Students and parents who meet income-level requirements often qualify for Internal Revenue Service college education tax credits. The credits reduce tax liabilities for the year and help offset some tuition costs. There are two main education tax credits -- the American Opportunity Credit and the Lifetime Learning Credit. Tax filers must choose between the two and can't claim both. If you claim an education tax credit, you can't claim tuition and fees deductions the same year you take the credit. IRS Form 8863 can help you calculate education credits.
Calculate your modified adjusted gross income. This includes foreign income and funds from Puerto Rico and other U.S. possessions. Follow IRS guidelines, use income tax software or consult a tax specialist to calculate. In most cases, your adjusted gross income is your total income for the year from all revenue sources, minus specific deductions, such as half of your self-employment tax, alimony payments and funds you applied toward certain retirement accounts, such as an IRA. For example, in 2013, if you filed your tax return as a single, you didn't qualify for the American Opportunity Credit if your modified adjusted gross income exceeded $90,000 per year -- $180,000 if you were married and filed jointly. To qualify for the Lifetime Learning Credit in 2013 your modified adjusted gross income couldn't exceed $63,000 if you were single, or $127,00 if you were married and filed jointly.
Add up the qualifying education expenses for each student in your family, including tuition, mandatory fees and required course materials, such as books, equipment and supplies. Include all qualifying expenses you paid during the current tax year plus any expenses you paid during the first three months of the following year. For example, on your 2014 tax return, include qualifying expenses you paid in 2014 plus those you paid in January, February and March of 2015. Don't include room and board costs, extracurricular activity fees, travel expenses or supplies that weren't part of your course requirements. You cannot include any expenses that were covered by grants or scholarships.
Calculate your American Opportunity Credit by taking 100 percent of the first $2,000 of all qualifying expenses paid for each student. If the qualifying expenses were less than $2,000, claim the full amount of your actual qualifying expenses. You also can claim 25 percent of the next $2,000 you paid toward each student's qualifying expenses. The maximum American Opportunity Credit you can claim is $2,500 per student. The American Opportunity Credit has been extended to 2017 and can be claimed for the first four years of each student's postsecondary education. Students must be enrolled at least half time at an accredited institution for a minimum of one academic period in the tax year. Each student must be pursuing an undergraduate degree or a specific college-level credential.
Calculate your Lifetime Learning Credit and compare it to your American Opportunity Credit. You can claim the Lifetime Learning Credit on all qualifying expenses up to $2,000 for all years of postsecondary education, including graduate school. However, the credit is per return, not per student. You also can claim the credit if students in your family took courses to improve their job skills -- enrollment in a degree program isn't required. Add together all qualifying expenses for all students in your family for that year plus expenses for the first three months of the following year. You can claim a maximum of $2,000 as a Lifetime Learning Credit on your tax return.
The IRS evaluates income limits every year, so research them before you complete and file your return. The 2013 income limits listed above serve as an example but may change for future years.
Qualifying expenses must be paid directly to the institution to qualify for the Lifetime Learning Credit. Qualifying expenses, such as books, supplies and equipment, do not have to be paid directly to the institution to qualify for the American Opportunity Credit. You can purchase those items from third-party vendors and still claim the credit. Students do not qualify for the American Opportunity Credit if they have felony drug convictions on their record, but they do qualify for the Lifetime Learning Credit.
- IRS: American Opportunity Tax Credit: Questions and Answers
- Kiplinger: Tax Credits for Education Expenses
- TurboTax: What Is Adjusted Gross Income (AGI)?
- TurboTax: How to Calculate Your Lifetime Learning Tax Credit on IRS Form 8863
- TaxSlayer.com: What are the differences between the American Opportunity Credit and the Lifetime Learning Credit?
- IRS: 5 Ways to Offset Education Costs
- IRS: Publication 970
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