Education Credits are for Children? Think Again!

Education Credits are for Children? Think Again!

College students

 

Who can claim education tax credits?

If you think that education credits are just for sending your children to college, think again—the credits are available to you, your spouse (if you are married), and your dependents. Even if you or your spouse is only attending school part-time, you still may qualify for a tax credit.

 

See Relax Tax’s College Playbook at relaxtax.com/college




There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester, or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary post-secondary institution that can participate in the U.S. Department of Education’s student aid programs. 

The credits phase out for higher-income taxpayers who are married filing jointly or who are unmarried. Those who are married filing separately do not qualify for either credit.

 

AOTC Qualifications

The following table provides the qualifications and details for both credits:

 

QUALIFICATIONS

AOTC

LLC

Allowance Period

First 4 years of postsecondary education

Any postsecondary education for any number of years

Enrollment

Must be considered at least a half-time student by the educational institution

Not required to be enrolled at least half-time

Program Type

Must be pursuing a program leading to a degree or another recognized educational credential

Not required to be enrolled for the purpose of obtaining a degree or other credential

Credit Applied

Per student

Per family

Credit Amount

100% of the first $2,000 and 25% of the next $2,000 in qualified expenses

20% of up to $10,000 in qualified expenses

Credit Refundable?*

40%

No, can only reduce tax

Qualified Expenses

Qualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendance

Qualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution

High-Income AGI Phase-out Ranges

Married Filing Jointly: $160,000 to $180,000

Married Filing Separately: No credit allowed

Unmarried: $80,000 to $90,000

Claim Both Credits on Same Return?

Yes, but not for the same student

 

 

See this related post from Dennis Harabin: The Different Circumstances of Education Tax Credits
Many students attend local colleges for the first two years and then transfer to a university for the remainder of their education. Knowing the university tuition will be higher, some parents take the LLC and wait on the AOTC, thinking they can use it in years with higher tuition and get a larger credit. This isn’t a good plan because the AOTC credit is only good for the first four years of post-secondary education. Thus, it is always better to claim the AOTC in the first four years.

 

Are Education Credits refundable?

*Generally, credits are non-refundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.

Many individuals who both work and attend school can be enrolled less than half-time and still qualify for the LLC.

Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses. Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education: the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.

Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent). This includes the information necessary to complete the IRS form and claim the credit. Sometimes the 1098-T needs to be retrieved online from the educational institution. The law requires the taxpayer to have this 1098-T in hand to claim either of the credits, but credit can be claimed for other qualified expenses. 

 

AOTC Qualified Expenses

The qualifying expenses for the AOTC and LLC differ in many cases. See the table below for which expenses qualify for the credits.

 

DEDUCTIBILITY OF EXPENSES 

EXPENSE

NOTES

AOTC

LLC

Apprenticeship Programs

Post-2018 - Fees, Books,

Supplies, Equipment

Required to participate in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.

No

No

Computer

If needed for attendance at the educational institution

See

Notes

No

Computer Software

If needed for attendance at the educational institution. Software for sports, games, hobbies only if educational in nature

See

Notes

No

Course Materials and Supplies

For the LLC, only if purchased from the institution as a condition of attendance

Yes

See

Notes

Equipment

If required for enrollment or attendance

Yes

No

Fees

If required for enrollment or attendance

Yes

Yes

Fees, Bundled

Must be allocated between qualified and personal fees

Yes

Yes

Fees, Non-Academic

Only if they are required to be paid to attend

Yes

Yes

Fees, Student Activity

If paid to the educational institution

Yes

Yes

Insurance

No

No

Medical

No

No

Room & Board

No

No

Travel Expenses

No

No

Tuition: Higher Education

Yes

Yes

Tuition: Hobbies, Sports, Games, Non-Credit Courses

If part of student’s degree program for AOTC and LLC. For LLC if required to acquire or improve job skills.

See

Notes

See

Notes
 
 
 
See this related post from Dennis Harabin: Tax Credits You Might be Missing
Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. 

 

 

If you have questions about how these education tax credit provisions apply to you or if you are missing out on credit, please give this office a call at  551-249-1040.

 

Does this sound too complicated? Dennis Harabin at Relax Tax makes it easy to understand.


Recommended Readings:

 

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