Reminder for Parents, Students: Check Out College Tax Benefits

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With back-to-school season in full swing, the Internal Revenue Service reminds parents and students about tax benefits that can help with the expense of higher education.

Two college tax credits apply to students enrolled in an eligible college, university or vocational school. Eligible students include the taxpayer, their spouse and dependents.

American Opportunity Tax Credit

The American Opportunity Tax Credit, (AOTC) can be worth a maximum annual benefit of $2,500 per eligible student. The credit is only available for the first four years at an eligible college or vocational school for students pursuing a degree or another recognized education credential. Taxpayers can claim the AOTC for a student enrolled in the first three months of 2018 as long as they paid qualified expenses in 2017.

Lifetime Learning Credit

The Lifetime Learning Credit, (LLC) can have a maximum benefit of up to $2,000 per tax return for both graduate and undergraduate students. Unlike the AOTC, the limit on the LLC applies to each tax return rather than to each student. The course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. The credit is available for an unlimited number of tax years.

To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Additionally, if claiming the AOTC, the law requires taxpayers to include the school’s Employer Identification Number on this form.

Form 1098-T, Tuition Statement, is required to be eligible for an education benefit. Students receive this form from the school they attended. There are exceptions for some students.

Wayne Lai, CPA, a tax manager with White Nelson Diehl Evans, said, “Although both credits are college tax benefits that parents and students should always consider, they will not always materialize due to income limitation.”

To claim the full AOTC, he said, the taxpayer’s modified adjusted gross income must be $80,000 or less if single, or $160,000 or less for married taxpayers filing jointly.  If the taxpayer’s MAGI is over $90,000 ($180,000 for married taxpayers filing jointly), he can’t claim the credit.  Anywhere in between those thresholds and the taxpayer will get a reduced credit.  For most filers, MAGI is the same as the amount of the AGI.

To claim the full LLC, the taxpayer’s modified adjusted gross income must be $55,000 or less if single, or $110,000 or less for married taxpayers filing jointly.  If the taxpayer’s MAGI is over $65,000 ($130,000 for married taxpayers filing jointly), he can’t claim the credit.  Anywhere in between those thresholds the taxpayer will get a reduced credit.

Other education benefits

Other education-related tax benefits that may help parents and students are:

  • Student loan interest deduction of up to $2,500 per year.
  • Scholarship and fellowship grants. Generally, these are tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Savings bonds used to pay for college. Though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years of age.
  • Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education. Contributions to a 529 plan are not deductible, but earnings are not subject to federal tax when used for the qualified education expenses.  Lai believes that while 529 plans offer the flexibility to change the beneficiary from one child to another, which makes opening only one account with large pooled resources an attractive option, families should consider having more than one 529 account if they are saving for multiple children.  All 529 plans have a named custodian, the parent, and one named beneficiary.  A family could use one plan to save for multiple children, Lai said, but the funds can only be used against qualified expenses incurred by the named beneficiary.  So if a parent has two children in college at the same time, then only distributions for the named child are covered.  Also, opening separate accounts allows parents to choose the proper investment allocation for each child depending on how far each child is away from attending college.

To help determine eligibility for these benefits, taxpayers should use tools on the Education Credits Web page and IRS Interactive Tax Assistant tool on IRS.gov.

Keep A Copy of Tax Returns

Taxpayers should keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income. Get one from the IRS for free.

The quickest way to get a copy of a tax transcript is to use the Get Transcript application. After verifying identity, taxpayers can view and print their transcript immediately online. The online application includes a robust identity verification process. Those who can’t pass the verification must request the transcript be mailed. This takes five to 10 days, so plan ahead and request the transcript early.

Lai concluded, “Depending on AGI, not every filer is going to realize tax benefits from education expenses.  However, taxpayers should always consult with their CPAs to determine eligibility and benefits.”

Additional IRS Resources:

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