If you pay educational expenses for yourself or your dependent, there are some tax considerations to keep in mind. In fact, with recent changes to the education credits and deductions allowed, you can claim quite a significant portion of education expenses against your current income. Whether you are a parent paying for your child’s education, or you’re an adult working part-time and attending school full-time, there is a great opportunity to lower your taxes and even possibly increase your tax refund.
American Taxpayer Relief Act
This legislative act, passed in 2013 for extension until 2017, extends the benefits of the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) through December 2017. The AOTC differs from previous education credits in that it allows you to claim expenses for items other than those expenses paid directly to the educational institution. However, these expenses that can be claimed cannot be living expenses – such as room and board, rent, travel expenses, and insurance. Additionally, your income must be under $90,000 if filing single (or $180,000 if married filing jointly) to qualify for the AOTC. The maximum credit for the AOTC is $2,500 per eligible student.
The Lifetime Learning Credit replaces the AOTC (which you can only claim for four years, after which you need to claim the LLC instead). The LLC can be claimed for an unlimited number of tax years, and you do not have to be pursing a degree in order to qualify. As long as your income is below $64,000 as a single filer (or $128,000 for married joint filers), you will qualify for the LLC. The maximum credit for the LCC is $2,000 per tax return.
To claim the American Opportunity Tax Credit or the Lifetime Learning Tax Credit, you must file Form 8863 (Education Credits). Note that you can claim the AOTC, the LLC, and the Tuition-Fees Deduction (below) all on the same tax return – but you cannot claim these tax breaks for the same student or the same education expenses. This is the IRS’ way of preventing people from getting double benefits for the same expenses.
Tuition and Fees Deduction
This tax break allows you to deduct up to $4,000 per tax return and is unlimited in its usage. To qualify, the student must be enrolled in at least one class at an eligible educational institution. Keep in mind, a tax deduction reduces your taxable income (versus a tax credit, which reduces your tax liability dollar-for-dollar).
Most tax professionals contend that a tax credit is better than a tax deduction because it saves you more money. The AOTC is a refundable tax credit, which means it can reduce your tax liability to below zero and potentially result in a (bigger) tax refund.
Every person’s situation is different and it will require some research to determine which option is best for you. Whether you are a grad student living on your own, an adult taking night classes, or a parent supporting your child in college, you should understand the tax breaks that are available to you.