Tax Credits to Help Pay for College
Spring is the time for graduations and this gets many people thinking about how to pay for college for themselves or for their children who have graduated or will be graduating in the next few years. Those who are worried about the burden of paying for college should know there are tax benefits available to help out. The two with the biggest benefits are the American Opportunity Tax Credit and the Lifetime Learning Credit. Here is some more information on both.
American Opportunity Tax Credit
- Tax credit of up to $2,500 per student for qualified education expenses. Note this is a tax credit, which reduces the taxes you owe, not a deduction, which reduces your income subject to tax.
- 40% of the credit is refundable; 60% is not refundable.
- The credit is available only for undergraduate students and only for the first four years of college.
- The credit can be taken for a maximum of four tax years.
- The student must be pursuing a degree at an accredited institution that is eligible to participate in the US Department of Education’s Federal Student Aid (FSA) programs.
- The student must receive Form 1098-T from the college and use the information on this form, including the EIN of the college, to complete Form 8863.
- The student must be enrolled at least half-time for at least one academic period during the tax year.
- If the student has been convicted of a felony for possessing or distributing a controlled substance, the credit is not available.
- Qualified expenses:
- Tuition
- Required enrollment fees
- Required course materials such as books, materials, and equipment.
- Qualified expenses that were paid using tax-free scholarships, grants, or employer-provided education assistance cannot be used to claim the credit. Funds coming from other tax-free sources including tax-free savings also cannot be used for the credit.
- There are income limits for the credit.
Lifetime Learning Tax Credit
- Tax credit of up to $2,000 per tax return (not per student) for qualified education expenses.
- There is no limit on the number of years this credit can be claimed.
- The credit is nonrefundable.
- The credit is available for all years of postsecondary education (not just undergraduate study). It can also be used for courses to acquire or improve job skills.
- The student does not have to be pursuing a degree or other educational credential.
- Felony drug convictions do not make the student ineligible for the credit.
- Qualified expenses:
- Tuition
- Fees required for enrollment or attendance, including payments required to be made to the institution for course-related books, supplies, and equipment.
- Like the American Opportunity Tax Credit, qualified expenses that were paid using tax-free scholarships, grants, or employer-provided education assistance cannot be used to claim the credit. Funds coming from other tax-free sources including tax-free savings also cannot be used for the credit.
- The institution must be accredited and eligible to participate in the US Department of Education’s Federal Student Aid (FSA) programs.
- The income limits for the credit are lower than for the American Opportunity Tax Credit.
Don’t let these higher education tax benefits slip away. If you are heading to school or if you have a child headed to school, keep track of the student’s expenses so you can reap the tax credits next tax season and lessen the burden of paying for college. If you have any questions about claiming these credits or about qualifying, please reach out! I’d love to help.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
