If you’re a college student or the parent of one, you’re likely always searching for ways to save on education expenses. Fortunately, there are tax credits available that can help reduce the cost of attending college. In this article, we will explain the various tax credits, their eligibility requirements, and how they work.
Tax Credit for College Students Explained
Tax credits are tax benefits that can be used to reduce the amount of tax you owe to the government. Unlike tax deductions, which only reduce the amount of taxable income, tax credits directly reduce the amount of tax you owe. In simple terms, if you owe $1,000 in taxes and have a tax credit worth $500, you’ll only have to pay $500 in taxes.
Types of Tax Credits Available for College Students
The two main types of tax credits available for college students are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Each has its eligibility requirements and can be used to cover different types of education expenses.
American Opportunity Tax Credit (AOTC)
The AOTC is a tax credit that undergraduate students can apply for if they are enrolled at least half-time in an eligible educational institution. To qualify for the AOTC, you cannot have completed four years of college education, and you cannot have claimed the AOTC for more than four tax years. The AOTC can be claimed for up to $2,500 per student per year for the first four years of college education.
The AOTC can be used to cover a wide range of education expenses, including tuition, fees, and course materials. The credit is partially refundable, which means that if the amount of the credit is greater than the amount of tax you owe, you may receive a refund for the difference.
Lifetime Learning Credit (LLC)
The LLC is a tax credit available to undergraduate, graduate, and professional degree students enrolled in an eligible educational institution. Unlike the AOTC, there is no limit to the number of years you can claim the LLC. However, the maximum credit you can claim is $2,000 per tax return, regardless of the number of students.
The LLC can be used to cover a wide range of education expenses, including tuition, fees, and course materials. Unlike the AOTC, the LLC is not refundable, which means that it can only be used to reduce the amount of tax you owe.
To qualify for the AOTC or LLC, you must meet specific requirements. First, you or your dependent must be enrolled in an eligible educational institution. Second, you must be paying for qualified education expenses, such as tuition, fees, and course materials. Third, you must meet certain income requirements.
For the AOTC, your modified adjusted gross income (MAGI) must be less than $90,000 if you are a single filer or less than $180,000 if you are filing jointly. The credit is gradually phased out for taxpayers with MAGI between $80,000 and $90,000 (or $160,000 and $180,000 for joint filers).
For the LLC, your MAGI must be less than $69,000 if you are a single filer or less than $138,000 if you are filing jointly. The credit is gradually phased out for taxpayers with MAGI between $59,000 and $69,000 (or $118,000 and $138,000 for joint filers).
Claiming the Credit
To claim the AOTC or LLC, you must include Form 8863, Education Credits, with your tax return. The form will ask for information about your educational institution and the qualified education expenses you paid during the tax year. It’s essential to keep all receipts and records of your education expenses, as they may be needed to support your claim.
It’s important to note that you cannot claim both the AOTC and LLC for the same student in the same tax year. You also cannot claim the credit if you are claimed as a dependent on someone else’s tax return.
Besides the AOTC and LLC, other tax benefits are available to college students and their families. For example, the Tuition and Fees Deduction allows taxpayers to deduct up to $4,000 in qualified education expenses from their taxable income. This deduction is available even if you do not itemize your deductions.
Another option is the Student Loan Interest Deduction, which allows taxpayers to deduct up to $2,500 in interest paid on qualified student loans. This deduction is available even if you do not itemize your deductions.
It’s also worth noting that some states offer their tax credits or deductions for education expenses. Be sure to check with your state’s tax agency to see if you qualify for any additional tax benefits.
In conclusion, tax credits are a valuable tool for college students and their families looking to save on education expenses. The American Opportunity Tax Credit and Lifetime Learning Credit are two of the most common tax credits available, but other tax benefits may be available as well. Keep track of your education expenses and consult with a tax professional or use tax software to ensure you are maximizing your tax savings. With a little bit of planning and organization, you can take advantage of these tax credits and reduce the financial burden of college education.