Posted by Tyler A. Dorso
Sending yourself, your spouse or one of your children to college can be very expensive. Having to pay for books, tuition, meal plans and housing can take a toll on bank accounts. 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 qualified expenses related to higher education, the government allows 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, with the first $2,000 of expenses 100% deductible, and the next $2,000 25% deductible. For example, if you have $3,000 in expenses, your possible credit would be $2,250 (100% of the first $2,000 and 25% 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 deduction. 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 in at least one course for the LLC and TFD. The expenses can be paid by either you, your spouse or a third party, except for the TFD, where the expenses must be paid by you 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, and transportation costs are example expenses that 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 for which you are eligible. The 2015 thresholds are based on your MAGI (for most people this is AGI).
Phaseout Ranges are as follows
- MFJ: $180,000-$160,000
- Single, HOH, QW: $90,000 – $80,000
- MFJ: $130,000-$110,000
- Single, HOH, QW: $65,000 – $55,000
- less than $130,000 = full $4,000 deduction
- between $130,000 – $160,000 = $2,000 deduction
- above $160,000 = no deduction
- Single, HOH, QW:
- less than $65,000 = full $4,000 deduction
- between $65,000 – $80,000 = $2,000 deduction
- above $80,000 = no deduction
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 expenses, on the other hand, 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 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 need the support for the expenses you are trying to claim.
- 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.
- If certain requirements are met, up to 40% of the AOTC is refundable.