American Opportunity Credit

The American Opportunity credit gives students the chance to reduce the cost of attending college. Students must meet several requirements to be eligible for the credit.

To be eligible for the credit, the student must be enrolled at least half time, for at least one semester in designated tax year, and be working towards a degree. If a student has already completed four years of college, they are no longer eligible. Any student that has been convicted of a state or federal criminal druge charge is not eligible for this credit.

Eligible institutions are not just limited to colleges and universities. Any college, university or trade school that meets the standards of the U.S. Department of Education financial aid program qualifies for this tax credit. The student needs to be paying tuition and fees at an eligible institution to include the credit. Any supplies that directly relate to the students field of study can be included in the credit.

For this tax credit, you cannot include amounts that come from any tax-free source, such as Pell grants. The credit also does not include certain expenses like room and board. For the borrowed funds a student uses, like student loans, there are no requirements by the IRS to reduce qualified expenses.

Students can only use one credit per year. If you are claiming two dependents who are both eligible students, you can use the American opportunity credit for both students. However, you cannot use it for dependent number 1 and then use another credit for dependent number 2.

The credit can equal 100% of the first $2,000 on the qualified expenses, and 25% of the next $2,000 of qualified expenses. The maximum amount an eligible student can claim is $2,500. If you are claiming more than one eligible student, you can claim the $2,500 for each as long you paid $4,000 adjusted qualified education expenses for each student.

For example, if you have two eligible students and paid $4,000 adjusted qualified education expenses for each, you can claim $2,500 for each eligible student. Alternatively, if you paid $3,500 in education expenses for the second student, you would only be able to claim $2,375 for that student (100% of first $2,000 [$2,000] plus 25% of the next $1,500 [$375]).

To claim this credit, you have to fill out and complete the IRA form 8863 and attach it to your personal tax return. The personal tax return can be the students, or whoever is claiming the student as a dependent on their tax return. As gross income gets higher, the credit phases out for the 2016 tax year. The phasing out starts at $80,000 and goes to $90,000 for single taxpayers. For joint filers, the phasing out begins as $160,000 and goes to $180,000. If you exceed $90,000 and $180,000 of adjusted gross income, the credit it no longer available.

Lifetime Learning Credit

Another option for an education tax credit is the Lifetime Learning Credit. The credit, like the American opportunity credit, reduces your taxes on a dollar-for-dollar basis. This reduction is on a piece of the tuition and/or fees paid for the student.

While it depends on your filing status, if your income over the year exceeds a certain limit, you may not qualify for the credit. If you made payments to a college or trade school for tuition or fees, you can qualify for the Lifetime Learning credit. Any post-secondary school classes you take can go towards the credit. You just have to be enrolled for at least one academic period starting in the tax year.

Just like the American opportunity credit, this credit phases out based on adjusted gross income for the 2016 tax year. The phasing out begins as $55,000 and goes to $65,000 for single filers, for joint filers the phasing out starts at $110,000 and goes to $131,000. If you exceed $65,000 or $131,000 for joint, you will not be able to claim the credit.

To claim this credit, you will need to fill out IRS form 8863 and attach that to your personal tax return. In order to fill out and complete form 8863 you will need your 1098-T that your educational institution should send you by January 31^st. Your 1098-T reports your eligible costs, and you can enter the amounts onto your 8863. Qualified expenses include required tuition, fees and supplies needed for enrollment.

The credit is 20% of the first $10,000 of qualified education expenses if you paid for all eligible students, with a maximum of $2,000 per return. Multiple education credits cannot be used in the same tax year. IRA limits education credits to one per student, per year.

Content in this material is for general information only and not intended to be a substitute for specific individualized tax advice. Tax laws and provisions are subject to change. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Sources:

1. https://www.irs.gov/publications/p970/ar02.html#en_US_2016_publink1000255787

2. https://www.irs.gov/publications/p970/ch03.html#en_US_2016_publink1000178173

3. https://www.irs.gov/publications/p970/ch02.html#en_US_2016_publink1000204390