Taxpayers, their spouses and/or dependents pursuing higher education could be eligible for an education credit that can reduce amount of tax owed by up to $2,500 per eligible student. There is often much confusion when it comes to which education credit to claim and on whose tax return, especially when it comes to dependents.
To claim an education credit, the eligible student must be taxpayer, spouse, or dependent listed on the tax return and enrolled at an eligible educational institution for at least half time and at least one academic period beginning the tax year. A student listed as a dependent on another person’s tax return, such as their parents, may not claim the education credit on their own tax return. If a student is not listed as a dependent on their parent’s tax return, the parents may not claim the credit, even if they are incurring all of the expenses. This is why it is important for parents and students coordinate who will be taking the education credit on their tax return.
The amount of the education credit is based on the type credit being claimed and the amount of qualified education expenses incurred during the tax year. Qualified education expenses include tuition and fees required to enroll at or attend an eligible educational institution. Other course-related expenses such as fees, books, supplies, and equipment that are required for all students in the courses are also qualified education expenses. However, room and board, travel, meals, research, clerical help, or equipment and other expenses not required for courses or enrollment are not qualified education expenses. Qualified education expenses must be paid by the taxpayer, spouse, dependent, or third party (ex. Relatives, friends, or a student loan) and may not be paid using scholarships and/or grants.
Eligible educational institutions will file Form 1098-T which will include the amount of tuition billed and also keeps track of any tuition and fees paid using any scholarships and grants which reduce the amount of qualified education expenses. The taxpayer claiming the education credit should report this information on their tax return. In addition to Form 1098-T, keep receipts of books and other course related expenses to report on their tax return.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is only available for the first 4 years of higher education per eligible student when pursuing a program leading to a degree or other recognized education credential. Typically, this credit is claimed for the first four years that a student that is enrolled at an accredited community college or four-year university working towards their undergraduate degree. However, the credit may not be claimed if the student completed the first four years of higher education at the beginning of the tax year, and if the ATOC or Hope credit was claimed for more than 4 tax years.
This credit allows a taxpayer to claim a credit of up to $2,500 per eligible student. The amount of the credit is equal to 100% of first $2,000 of qualified education expenses and 25% of next $2,000, or $500. In addition, this credit is refundable, up to 40% ($1,000) of it even if no tax is owed. For tax year 2018, the credit begins to decrease or “phase out” when Modified Adjusted Gross Income is between $80,000-$90,000 and $160,000-$180,000 for married filing joint. Once MAGI is greater than $90,000 and $180,000 the credit may not be claimed.
In order to take full credit of $2,500 in 2018, the eligible student must have at least $4,000 in qualified education expenses and the taxpayer should not have MAGI over $80,000 or $180,000 married filing separate.
Lifetime Learning Credit (LLC)
There is no limit on the number of years this credit can be taken. This credit may be claimed for qualified education expenses for undergraduate, graduate and professional degree courses, including courses to acquire or improve job skills.
This credit allows a taxpayer to claim a credit of up to $2,000 per eligible student. The credit is equal to 20% of first $10,000. However, the Lifetime Learning Credit, unlike the American Opportunity Tax Credit is not refundable. In comparison to the AOTC, the income phaseout ranges are also less. In 2018, the credit begins to decrease or “phase out” when MAGI of $57,000-67,000 and $114,000-$134,000 for those married filing joint.
In order to take the full credit of $2,000 in 2018, you’ll need at least $10,000 in qualified education expenses and the tax payer should not have a MAGI exceeding $57,000 or $134,000 married filing joint.