WWW.ICONTAXGROUP.COM PHONE: 877.778.1770
by Michael Lodge
This past week we had a tax client come in thinking she could deduct the tuition she paid sending her child to a private school. She was shocked when she found out that she could not deduct the child’s tuition. So now it is time to go over the education tax credits that are allowable and not allowable.
The American Opportunity Tax Credit
The familiar Hope Credit has been temporarily replaced by the new and improved American Opportunity Credit. For your 2015 taxes, the American Opportunity Credit:
- Can be claimed in amounts up to $2,500 per student, calculated as 100% of the first $2,000 in college costs and 25% of the next $2,000.
- May be used toward required course materials (books, supplies and equipment) as well as tuition and fees.
- May be applied against four years of higher education (instead of just two years under the previous Hope Credit).
What’s more, the new tax credit is available to more taxpayers than the Hope Credit. The full credit may be claimed by people with adjusted gross income (AGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. The credit is gradually reduced at higher income levels. Lower-income taxpayers also benefit because up to 40% of the credit (or $1,000) is refundable, meaning that you can expect a check from the government if you owe no taxes
For your 2015 taxes, the American Opportunity Credit continues to replace the less-generous Hope Credit will return. The nonrefundable Hope Credit provides a maximum credit of $1,800 per student, but only for the first two years of college. It phases out for single taxpayers with AGI between $50,000 and $60,000 and for married taxpayers filing jointly with AGI between $100,000 and $120,000.
The Lifetime Learning Credit
The maximum annual credit is $2,000, calculated as 20% of the first $10,000 in qualifying educational expenses. But there is no limit on the number of years of higher education for which you can claim it. As a result, although the American Opportunity Credit yields a higher tax credit of up to $2,500 per student and is the best bet for most undergraduates, the Lifetime Learning Credit may be particularly helpful in reducing costs for graduate students or students who are taking post-secondary courses but not pursuing a degree.
Income limits for taking the Lifetime Learning Credit are the same as those for the Hope Credit, outlined above.
Married couples who file separate tax returns cannot claim any of these credits. In addition, you cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.
For 2015, most parents will come out ahead with the more generous American Opportunity Credit.
Additional tax breaks
You can save even more money on the cost of higher education thanks to a few other tax benefits:
- Even if they don’t itemize their deductions, both parents and students can deduct up to $2,500 of interest on student loans through the end of the 2015 tax year. The deduction is available to single taxpayers with AGI under $75,000 and married taxpayers with AGI under $150,000. If you paid more than $600 in student loan interest you’ll receive Form 1098-E at tax time.
- In 2015, when you redeem eligible Series EE and I bonds to pay qualified higher education expenses, the interest on those bonds is not taxable but this tax break begins to phase out if parents owning the bonds have AGI above $77,200 for single filers and $115,751 for married couples filing jointly. The interest exclusion from income is not available for taxpayers filing as married filing separately.
- Interest on earnings in other plans you can use to save for college, including Coverdell Savings Accounts and 529 Education Savings Plans, is not taxable if you use the money to pay for higher education expenses. College expenses you pay from either of these plans aren’t eligible for the American Opportunity or Lifetime Learning credits. If the college expenses you pay in a particular year exceed the amount available from one of these plans, you are allowed to claim a credit for the excess amount.
Most education tax credits are taken by parents. But they can be claimed by students who pay their own college expenses, file their own tax returns and are not claimed as dependents on anyone else’s return.