College students should study up on these two tax credits Internal Revenue Service

You can’t deduct education expenses you use to calculate the AOTC anywhere else on your tax return. For example, if you deduct textbook expenses as a business expense, the IRS says you can’t use those book expenses to calculate the AOTC. The premium tax credit is usually restricted to taxpayers who earn between 100% and 400% of the federal poverty guidelines, but for 2021 and 2022 the upper limit restriction has been eliminated. Those earning four or more times the poverty threshold will receive a premium tax credit equal to the cost of health premiums minus 8.5% of their household income. The American Opportunity Tax Credit (AOTC) is another federal tax incentive designed to help families pay for college expenses. Previously known as the Hope credit, the AOC can be claimed for expenses related to your or your child’s college expenses of up to $2,500 per tax year.

The TCJA suspended dependency exemptions for tax years 2018 through 2025. The scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education expenses (such as room and board). After the tax credit is applied to the taxpayer’s tax liability, 40% of any remaining tax credit (up to $1,000) may be refunded to the taxpayer. The tax credit is not refundable if the taxpayer can be claimed it as an exemption on someone else’s income tax return. You can’t take a lifetime learning credit and the American opportunity tax credit. You can’t deduct higher education expenses and claim the AOTC for the same expenses.

Here are some key things taxpayers should know about each of these credits.

However, just because any nontaxable scholarship or grant can be applied to qualified education expenses when calculating education credits does not necessarily mean it must be applied. To be eligible for the Lifetime Learning Credit, a student must be enrolled in a course to earn education credits or improve job skills at an eligible educational institution for at least one academic period, as determined by the school. The student will receive a Form 1098-T, Tuition Statement, from the educational institution if it is an eligible school as defined by the IRS.

• The Lifetime Learning Credit has broader eligibility requirements than the AOTC, as it is intended for taxpayers at all education levels.
• It’s worth up to 100% of the first $2,000 of qualified education expenses and 25% for the next $2,000 of those expenses, for a maximum credit of $2,500 per eligible student.
• You can’t take a lifetime learning credit and the American opportunity tax credit.
• You may not need to pay income tax on amounts forgiven through the public service loan forgiveness or other assistance programs that are listed below.
• Most of these reports concern the complexity of having multiple overlapping education tax benefits, which causes taxpayers to make suboptimal choices concerning which tax benefits to claim.

Taxpayers may claim the Lifetime Learning Tax Credit in the same year a tax-free distribution is made from a 529 plan or Coverdell Education Savings Account as long as there is no double-dipping. Different expenses must be used to justify the Lifetime Learning Tax Credit and a tax-free distribution from a 529 plan. For example, families who claim the maximum Lifetime Learning Tax Credit and have $16,000 in qualified education expenses in a given tax year may withdraw $6,000 tax-free from a 529 plan.

Tax credits for investing in education or for retirement

If you used funds from a tax-free scholarship, grant, or employer-provided educational assistance to cover the cost of education expenses, you cannot those costs as a business expense. This education credit can be claimed for an unlimited number of years, too. This means it can reduce your tax bill to zero, but you won’t receive any portion of the credit as a tax refund. The Lifetime Learning credit is another https://turbo-tax.org/ education tax
credit, but it has a broader reach than the American Opportunity credit. This credit can’t be taken in
the same year as the American Opportunity credit on behalf of the same student. Our final group of tax credits includes money back on your taxes for making energy efficient improvements to your home, first-time homebuyer credits and incentives for purchasing electric cars.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. A tax credit is more valuable than a tax deduction of the
same amount. A tax credit reduces any taxes owed on a dollar-for-dollar
basis, whereas a tax deduction simply reduces the total income on which your
taxes are based.

Employer-Provided Educational Assistance

In 2023, a full credit is available to single filers with a
modified adjusted gross income (MAGI) below $80,000 and joint filers with a
MAGI below $160,000. A partial credit is available to single filers with a MAGI
between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and
$180,000. For parents and students trying to manage college bills and
student loan payments, the federal government offers education-related tax
benefits.

Lastly, both the taxpayer and the student claiming the tax credit must have valid Social Security or other tax identification numbers at the due date of the tax return. A tax credit provides taxpayers with a dollar-for-dollar reduction of their tax bill. This differs from a tax deduction, which is a dollar amount the IRS allows taxpayers to subtract from their adjusted gross income (AGI) to lower their taxable income. If https://turbo-tax.org/bigger-better-college-tax-credit/ you claim a $1,000 lifetime learning credit on the $5,000 for tuition, you must reduce the qualified expenses on your 529 plan by $5,000. That leaves you with a “nonqualified” withdrawal of $5,000, the earnings of which you will have to report on your federal tax return. If you want to avoid paying federal income tax on interest from these savings bonds, you must use the earnings to pay for qualified education expenses.

You also need to have income that does not exceed the income threshold the IRS sets each year. You will claim your exclusion of interest from series EE and I savings bonds on Form 8815. If your income qualifies you for an MCC, you can get a credit for a percentage of your mortgage interest up to $2,000. The percentage of interest that you can claim varies from state to state, ranging from 10 to 50 percent.

• Another major tax credit offered by the federal government for expenses related to college education is the American Opportunity Tax Credit.
• The American Opportunity Tax Credit (AOTC) is a partially refundable tax credit that provides up to $2,500 per student per year to pay for college.
• If the student claims the tax credit, the student will not be eligible for partial refundability if he or she can be claimed as an exemption.
• Students must be enrolled in school at least half-time to claim the credit.

And if you paid for education expenses with tax-free funds, such as a scholarship or grant, you can’t claim an education credit for those expenses, too. The amount of the credit is equal to 100% of the first $2,000 on qualified education expenses paid for each student and 25% of the next $2,000. In other words, if your qualifying educational expenses are $4,000 or more, you would be allowed the maximum credit of $2,500.

Maximizing the higher education tax credits

This form is used to help determine the amount of qualified educational expenses that filers can claim. • Parents and students with an Adjusted Gross Income under $85,000 if single or under $175,000 if married can deduct up to $2,500 of interest paid on student loans through the end of the 2022 tax year. If you paid at least $600 in student loan interest during the year, your loan servicer should send you a Form 1098-E showing how much you paid. You just need to call your loan servicer or log in to your online account to find the amount of interest you paid. The LLC is available if you or your student don’t qualify for the AOTC. The LLC is available for undergraduate, graduate, professional, and continuing degree courses.