There is no question that for most households, education expenses are one of the most expensive line items. College costs continue to rise. Fortunately, Congress has tried to help soften the tuition bill by providing education credits. There are some benefits for both the parents paying for their children’s secondary education as well as for individuals covering their way through graduate school. There are two tax credits available to help you offset the costs of higher education: the American Opportunity Tax Credit and the Lifetime Learning Credit.
The most widespread tax credit that filers use for their children in college is the American Opportunity Tax Credit (AOTC). The credit is available to each student for four years. If your child elects to do a fifth year of undergraduate studies this credit will not be available.
Fortunately, this credit was extended through December 2017 by the American Taxpayer Relief Act of 2012. The American Opportunity Tax Credit (AOTC) modifies the existing Hope Credit. The AOTC makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two.
Many of those eligible will qualify for the maximum annual credit of $2,500 per student (www.irs.gov). The full credit is available to individuals, whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing jointly and phased-out for both filers filing above these levels.
For the Lifetime Learning Credit, there is no limit on the number of years the credit can be claimed for each student. Like the AOTC, your income may limit the amount of the credit that you may capture.
The full credit of $2,000 is available to individuals, whose modified adjusted gross income is $63,000 or less, or $127,000 or less for married couples filing jointly and phased-out for both filers filing above these levels. Furthermore, this available for all years of postsecondary education and for courses to acquire or improve job skills. Qualified expenses for this credit include tuition and fees required for enrollment or attendance. Lastly, you may not use this credit if you already are claiming the AOTC for the same student in the current tax year.
Secondary education is certainly expensive and unfortunately tax credits will not dramatically lower the price of secondary education. It is necessary to start planning for your child’s education as soon as possible. There are several savings vehicles that every parent can use and we highly recommend for clients. Talk to us today to start planning for your child’s educational needs.