Understanding Education Tax Credits (Form 8863)
Education is one of the biggest expenses that parents and students will face. Thankfully, there are two education tax credits that can be used to help offset the cost. These tax credits are the American Opportunity Credit and The Lifetime Learning Credit
The American Opportunity Credit
The American Opportunity credit is good for the first four years of a child’s college education. This education tax credit is worth up to $2,500 of tax savings. This $2,000 is based on college expenses. You are given 100% credit for the first $2,000 of expenses and 25% of the next $2,000 of expenses.
To receive this credit for your student, your child must be enrolled in college at least part-time and you as the parent must fall within certain income parameters. Here are the limits for 2016:
- If you file your tax return as single status- your Modified Adjusted Gross Income (MAGI) must be under $80,000. However, as a single status tax filer, you can receive a partial credit if your MAGI is between $80,000 and $90,000.
- If you file your tax return as joint status-your MAGI must be under $160,000. You can receive a partial credit if your MAGI as a joint filer is between $160,000 and $180,000.
Also, keep in mind that if the student has a drug-related felony for possessing or distributing a controlled substance they will be disqualified from the American Opportunity Credit indefinitely!
You can take this credit simultaneously for as many children you have that qualify for the credit. However, you cannot take the American Opportunity Credit and the Lifetime Learning Credit at the same time for each child.
The Lifetime Learning Credit
The lifetime learning credit is worth up to a maximum of $2,000. This education tax credit is given to you from 20% of the first $10,000 of tuition. This credit is applicable to any higher education courses that you take during your lifetime. This credit can apply to graduate or undergraduate students, as well as students who attend classes for less than part-time. Community college classes would also count toward this credit.
Just like the American Opportunity credit, you have to fall in certain income parameters to qualify for the credit. Here are the limits for 2016:
- If you file your tax return as a single status- your MAGI must be below $55,000. You can receive partial credit if your income is between $55,000 and $65,000.
- If you file your tax return as joint status- your MAGI must be below $111,000. You can receive partial credit if your income is between $111,000 and $130,000.
With this credit, you are limited to $2,000 per tax return. This means that if you have three children that all qualify for the lifetime learning credit at the same time you can only take the $2,000, not $6,000.
Besides education tax credits, there are also several education-related deductions that you can take advantage of. You can deduct qualified higher education expenses from your tax return if you fall within the income parameters. If you are single and your MAGI is $65,000 or less or if you file a joint return with a MAGI of $130,000 or less you can deduct up to $4,000 of expenses. If you are single and have a MAGI of $65,000 and $80,000 or if you are a joint filer and have a MAGI between $130,000 and $160,000 you can deduct up to $2,000 of expenses.
You can also deduct interest from any student loans that you have. You can deduct up to $2,500 of interest that you pay, of course, if you meet the income qualifications. In 2016 if you file a single status tax return you must have a MAGI of less than $65,000 for a full deduction. If your income is between $65,000 and $80,000 you can take a partial deduction. If you file a joint status tax return in 2016 you can take a full deduction if your MAGI is less than $130,000. You can take a partial deduction if your MAGI is between $130,000 and $160,000.
There are many different tax opportunities that are available to students and their parents. If you would like to know if you would qualify for any of these education tax credits or deductions meet with a qualified tax professional who can analyze your unique situation.