Higher Education Tax Breaks

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College is not getting any cheaper, but at least it has an upside. Credits and deductions related to education can decrease your tax bill by a few thousand dollars. Studies show that the cost of higher education continues to rise, despite a very low inflation rate. Parents and students should know that they can take advantage of several tax benefits in order to greatly reduce their education bills. Read on to get all the necessary details.

The American Opportunity Credit

The new American Opportunity Tax Credit (which replaced the Hope Credit) can go up to $2,500 per student, per year of study (up to four years, two years more than the previous Hope Credit). The credit is for 100% of the first $2,000 spent in college and one quarter of the next $2,000. This credit can be used toward obligatory course materials (equipment, books), tuition and fees.

This credit is available to more people than the Hope Credit was. Anyone with an AGI (adjusted gross income) of no more than $80,000 (or $160,000 if married, filing jointly) can claim the full American Opportunity Credit. The credit is progressively decreased for people with higher income. On the other hand, low-income taxpayers might get an unexpected present from the government. Up to 40% of the credit ($1,000) is refundable. In other words, the government might send a check to the taxpayer even if no taxes are owed.

You cannot claim this credit if you file your return as married filing separately, your modified adjusted gross income is $90,000 or more ($180,000 or more if you’re married and file jointly), you are a dependent of someone else or you (or your spouse, if you file jointly) were a nonresident alien for any part of 2019 and chose to not be treated as a resident alien for tax purposes. Also, if you claim the Lifetime Learning Credit or a tuition and fees deduction, you cannot claim the American Opportunity Credit.

For next year, it looks like the Hope Credit is returning, unless Congress extends the American Opportunity Tax Credit. How does the Hope Credit work? It awards at most $1,800 per student and just for the first two years of college. It excludes single people who have an AGI between $50,000 and $60,000, and married people filing jointly who have an AGI between $100,000 and $120,000.

The Lifetime Learning Credit

You can get at most $2,000, distributed as 20% of the first $10,000 in qualifying expenses. There is, however, no limit to the number of years of education for which the credit can be claimed. Unlike the American Opportunity Credit, which provides for a higher maximum amount and is good for undergraduates, the Lifetime Learning Credit can be a great choice for graduate students and students attending post-secondary courses without going for a degree.

AGI limits for the Lifetime Learning Credit are identical to those for the Hope Credit (read above).

The Lifetime Learning Credit is nonrefundable, meaning it is limited to the amount of tax you have to pay on your taxable income. Unlike the American Opportunity Credit however, this credit is available for an unlimited number of study years and it can be claimed by students with felony convictions on their record.

Neither the American Opportunity Credit nor the Lifetime Learning Credit can be claimed by married couples who file separate returns. Additionally, a student cannot claim any of them if he or she has also claimed the tuition and fee deduction.

Other Tax Breaks

Keep in mind that you have other opportunities to decrease your tax bill.

For example, parents and students can deduct up to $2,500 of interest on student loans, even if they do not itemize deductions. This opportunity is only for single people with an AGI lower than $75,000 and married people with an AGI of $150,000 maximum.

The Tuition and Fees Deduction Form (Form 8917) is another option to reduce the burden on education expenses. The deduction can go up to $4,000 and it can be claimed by the student (you, your spouse, or your dependent child). Only enrollment and tuition fees can be deducted. So any related expenses, like books, food, accommodation, transportation, medical or insurance expenses, as well as non-credited courses (such as a hobby-related course) can’t be deducted.

A pre-condition to qualify for a Form 8917 deduction is that your MAGI (modified adjusted gross income) is less than $80,000 (or, if married filing jointly, $160,000). To claim this deduction you cannot be a dependent of another person, be married and file separately, or be a nonresident alien. Also, if you already applied for another learning credit (Hope Credit), you cannot apply for a Form 8917 deduction.

The interest on Series EE and bonds is not taxable if the parents who own the bonds have an AGI between $70,100 and $85,100 (for single filers) or $105,100 to $135,100 (for married couples filing jointly).

Additionally, the interest on earnings in saving plans (for example Coverdell Savings Accounts and 529 Education Savings Plans) is not taxable, if the money is used for higher education spending. Higher education expenses that are paid from these plans are not however eligible for the American Opportunity Credit or Lifetime Learning Credit. If, during a certain tax year, you pay more for college than the amount available from these plans, you can claim credit for the excess amount.

Usually, it is the parents who take tax credits for education expenses, but students can claim them as well, if they pay their own education expenses, file their own returns and are not considered dependents on somebody else’s tax return.

One general rule that IRS has for education related credits is that normally you cannot claim more than one credit for a certain eligible expense.