Posted by Tyler A. Dorso
Luckily, the IRS has credits and deductions in place to help those who desire a higher education. The IRS allows taxpayers to take the expenses they’ve incurred relating to higher education and use them to reduce the amount of their tax liability. For the qualified expenses related to higher education, the government gives you three ways to reduce the amount of tax each year. The American Opportunity Tax Credit (AOTC), Lifetime Learning Credit (LLC) and the Tuition and Fees Deduction (TFD). You can use all three benefits on one tax return but it cannot be used for the same student or expenses.
The AOTC has a maximum benefit of $2,500 per student, the first $2,000 of expenses are 100% deductible the next $2,000 are 25% deductible. For example, you have $3,000 in expenses; your possible credit would be $2,250 (100% of the first $2,000 and 25% or $250 of the remaining $1,000). The LLC has a maximum benefit of $2,000 per tax return or 20% of the first $10,000 in expenses. The maximum benefit for the TFD is a $4,000 credit. The LLC and ATOC reduce your tax liability dollar for dollar. The TFD reduces the amount of income you are taxed on.
In order to claim the benefits one must meet certain requirements. The AOTC can only be claimed for expenses incurred for the first four years of post-secondary education. The LLC and TFD can be claimed for expenses in any year of post-secondary education. The LLC can be claimed for courses in any degree level and for non-degree courses when the expenses are incurred to obtain or improve skills related to your job. The student must be enrolled at least half time for the AOTC and at least one course for the LLC and TFD. The expenses must be paid by either you, your spouse or a third party, except for the TFD, the expenses must be paid by your or your spouse. For each of these benefits only certain expenses are eligible to be claimed. All three benefits can use expenses for tuition and fees required to be enrolled at the institution and fees for course materials (i.e. books, calculators, access cards) needed to complete the course. Room and board, medical expenses, transportation costs are example of expenses than cannot be used for the deduction.
After you’ve determined who is eligible and what expenses are eligible, you must assess how much of a benefit you can use. The IRS has put in place certain thresholds on income to limit the amount of benefit you are eligible. The 2015 thresholds are based off of your MAGI (for most people this is AGI).
- AOTC: MFJ – $180,000 – $160,000
Single, HOH, QW – $90,000 – $80,000
- LLC: MFJ – $130,000 – $110,000
Single – HOH, QW- $65,000 – $55,000
- TFD-: MFJ – less than $130,000 = full $4,000 credit
Between $160,000-$130,000 = $2,000 credit
Above $160,000 = no credit
Single, HOH, QW – less than $65,000 = full $4,000 credit
Between $80,000 and $65,000 = $2,000 credit
Above $80,000 = no credit
Things to Remember
- The benefits cannot be claimed for expenses that are reimbursed.
- Expenses paid with borrowed funds can be used to claim the benefits.
- Qualified education expenses must be reduced by any tax-free education assistance. (Scholarships, Pell grants, employer provided education assistance…)
- Plan who pays the expenses, the AOTC and LLC, expenses can be paid by anyone. The TFD on the other hand, expenses must be paid by either you or your spouse. If a relative would like to pay some of the expenses, have them gift it to you or your spouse, then pay for the expense. This will allow you to claim one of three benefits and not just one of two.
- If you file Married Filing Separately you are ineligible to claim all three benefits.
- Keep proper documentation. When it comes time to file your taxes you have the support for the expenses you are trying to claim.
- The AOTC is made permanent by the PATH Act of 2015
- The AOTC can be transferred to the student. If it is more beneficial for the student to claim the credit, do not claim them as a dependent, forgo their dependency exemption, and have them file their own tax return claiming the credit.
- Tuition and Fees Deduction is extended through 2016 by the PATH Act of 2015.