College Tax Credit
Paying for college for you, your spouse, or any dependents you can claim on your taxes? If so, you could be eligible for a college tax credit when you file your federal taxes. Here’s what you need to know.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 for qualified higher education expenses. Eligible students must be in their first four years of higher education. The first $2,000 of eligible expenses are 100% refundable and 25% of the next $2,000. The credit can be claimed for each eligible student. If you have 2 children with qualified expenses in their first 4 years of school, you will qualify for up to $5,000 in credit.
Qualified education expenses include tuition and fees required as a condition of attendance. Additionally, the AOTC allows books, supplies, and equipment expenses required for a course even if these expenses aren’t paid to the institution. Room and board are NOT qualifying expenses.
Limitations
GI Bill or other VA benefits – You must have qualifying expenses so if the GI Bill is covering 100% of tuition and fees, your ability to claim may be limited. You may be able to deduct books or other supplies required for courses.
529 Funds – You can use 529 tax-advantaged funds the same year you claim the AOTC, but you must have $4,000 of non-529 expenses to qualify for the credit.
The credit can be used up to 4 times per eligible student. Because the academic and tax years, typically don’t line up you might have 5 tax years to get the credit.
Bottom line: Creating a 4-year funding plan is a critical step to ensuring you’re using your assets efficiently.
Income Limitations
The AOTC phases out depending on your Modified Adjusted Gross Income. The MAGI phaseout for single filers is between $80,000 and $90,000. If your MAGI is greater than $90,000, you do not qualify. The MAGI phaseout for married couples filing jointly is between $160,000 and $180,000. You do not qualify if your MAGI is greater than $180,000.
Are there any strategies to lower your MAGI?
The easiest way to lower your MAGI is to defer more of your income. This can potentially be done by maximizing your tax-deferred (or Traditional) qualified retirement plan (401(K), Thrift Savings Plan, 457, or SEP IRA) or a Traditional IRA (if you can deduct the contribution). Your MAGI would need to be close to the $180,000 phaseout as there are limitations on how much you can contribute to retirement plans and IRAs.
Lifetime Learning Credit
The Lifetime Learning credit is another potential source of tax credits for college expenses. It is less generous than AOTC, but it can be used for graduate school and beyond the first four years of higher education. If you qualify for both, AOTC is nearly always the better option.
The Details
The Lifetime Learning credit provides a credit equal to 20% of up to $10,000 of qualified expenses. It has an expanded definition of qualified expenses including non-degree programs and for courses to acquire or improve job skills. The Lifetime Learning credit is also available for students not taking a 50% course load.
The Lifetime Learning credit is a per-family credit. This means multiple students (you, your spouse, and children) can qualify, but expenses are aggregated. Unlike the AOTC only one $2,000 credit may be claimed.
Qualified expenses are tuition and mandatory fees. You can also deduct required books and supplies, but only if you purchase them through the institution.
Limitations
GI Bill or other VA benefits – You must have qualifying expenses so if the GI Bill is covering 100% of tuition and fees, your ability to claim may be limited. You may be able to deduct books or other supplies required for courses.
529 Funds – You can use 529 tax-advantaged funds the same year you claim the AOTC, but you must have $4,000 of non-529 expenses to qualify for the credit.
This college tax credit is available any year you have qualifying expenses and meet the income limitations.
Income Limitations
The Lifetime Learning credit phases out depending on your Modified Adjusted Gross Income. The MAGI phaseout for single filers is between $80,000 and $90,000. If your MAGI is greater than $90,000, you do not qualify. The MAGI phaseout for married couples filing jointly is between $160,000 and $180,000. You do not qualify if your MAGI is greater than $180,000.
Claiming Your College Tax Credit
Claiming either the AOTC or Lifetime Learning college tax credit can be tricky if you are using the GI Bill, have other scholarships, or are taking distributions from a 529 plan. Every situation is different. The IRS has great information and numerous examples in Pub 970 Tax Benefits For Education (Link).
Be sure to talk to a tax professional or financial planner if you aren’t sure of your options. If you want to build a college funding plan to maximize your assets and see if you can take advantage of these tax credits, please don’t hesitate to set up an initial call with me. You can schedule that here (Link).
If you’re interested in college planning, check out this article 7 Reasons To Save In A 529 Plan (Link).
