Back to school? Reduce your financial burden with college tax credits.

College is expensive, but there are ways to make it easier.  If you haven’t looked into college tax credits, you may be leaving money on the table.

Take a moment to see if you or your child qualify for college tax credits or other educational tax benefits when it comes time to file 2015 federal income tax returns.

There are two major programs providing tax relief for educational expenses.  The American Opportunity Tax Credit, and the Lifetime Learning Credit , are both tax relief programs for those who pay qualifying expenses for an eligible student.  An eligible student can be the taxpayer, or the spouse or dependent of the taxpayer.  The two programs differ slightly:  the American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.

When looking at these tax credit plans, you may find that there is an overlap in what they require to qualify.  Even if that is the case and you find that you qualify for both plans, you may claim only one credit plan per student, per year.    Also, be aware that the credits are subject to income limits, which may affect how much you may claim on your taxes.

The IRS has an Interactive Tax Assistant tool to help walk you through the process and assess your eligibility for these benefits.  Usually, students are given Form 1098T from their school or institution by January 31st (or the nearest workday) of the following year, which has financial information about educational spending and reimbursement.  The figures listed here should not be taken as absolute, however; the amount you may claim for these tax credits may be different from what is shown here.

The American Opportunity Tax Credit

If you qualify for the American Opportunity Tax Credit, you may be eligible to receive up to the maximum annual credit of $2,500 per student.   You can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years.  The credit may only be used for four tax years per eligible student, and it may only be used for those students who complete their first four years of post-secondary education after 2015.

Under the American Opportunity Tax Credit:

•    You can list amounts that you pay for tuition, fees, and other related expenses as qualified education expenses.  This does not include other secondary expenses, such as room and board.

•    You can receive credits covering all of the first $2,000 you spend.  After that, you can receive credits that cover up to 25% of the next $2,000.  If you pay $4,000 or more in qualified expenses for an eligible student, you may receive the full amount possible – a $2,500 credit.   

•    Even if you don’t owe any tax, you can still get an annual payment of up to $1,000 for each eligible student, because 40% of this Tax Credit is refundable.

•    There is an income cap for receiving the full credit under this program.  You can only receive the maximum credit if your modified adjusted gross income (MAGI) is less than $80,000.  For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.

The Lifetime Learning Credit
This tax credit is available to graduate and undergraduate students, up to $2,000 per tax return.  There is an important difference between this and the American Opportunity Tax Credit:  the limit on the Lifetime Learning Credit applies to each tax return, instead of to each student.   In addition, there is  no benefit to those who owe no taxes under the Lifetime Learning Credit program.

There are certain requirements to qualify for this program.  The course of study must be necessary to maintain or improve job skills, or be part of a post-secondary degree program.  

Other things to know about the Lifelong Learning Credit:

Your enrollment or attendance tuition and fees qualify for the Lifelong Learning Credit, as do other fees required for your qualified courses.  Secondary expenses do not qualify.

The full amount of $2,000 credit is possible for taxpayers who pay more than $10,000 in qualifying tuition and fees and who have sufficient tax liability.

Under the Lifetime Learning Credit, income limits are lower than under the American Opportunity Tax Credit.  For example, in 2015, taxpayers whose MAGI is $55,000 or less may claim full credit

For a married couples filing a joint return, the limit is $110,000. The credit is phased out for taxpayers with incomes above these levels.

Joint filers whose MAGI is $130,000 or more and singles, heads of household and household and some widows and widowers whose MAGI is $65,000 or more cannot claim credit.

You can adjust and maximize these benefits by modifying your withholding allowances.  Fill out a new Form W4 to claim additional withholding allowances, and turn it in to your company.

These credits do not only apply to college.  They include a variety of higher learning options.

Institutions that qualify include colleges and universities, as well as vocational schools.  Both non-profit and for-profit institutions are included.  

There are a many other tax benefits created to help with education expenses.  You should research:

    •    Scholarship and fellowship grants
These are typically tax-free if they are used to pay for relevant expenses such as tuition, required enrollment fees, books and other course materials.  However, they may be taxable if used for room, board, research, travel or other expenses.

    •    Student loan interest deduction
Up to $2,500 per year may qualify.

    •    Savings bonds used to pay for college
Although there are sine income limits, interest for these bonds is often tax-free if they were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.

    •    Qualified tuition programs
Also called 529 plans, these are used by many families to prepay or save for a child’s college education.

Between these various programs, there is a variety of financial help available for educational expenses.    Your education, or that of your child, should be a top priority.  Make sure you take advantage of all the tax and financial credits that you qualify for, so that you can concentrate on what’s really important:  preparing for your best possible future.

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