(This is part 3 of a 3-part series of related blogs. Part 1 discussed child related credits; Part 2 discussed tax on children’s income.)
If you have (or are) a college student you may qualify for a Higher Education Tuition Credit. There are two different credits allowed -- depending on whether the student is in the first four years of college or pursuing additional education beyond four years, such as a Master’s degree. Of course, you may not take both credits for the same student in the same year.
The American Opportunity Tax Credit (AOTC, formerly the Hope credit) is allowed up to $2,500 per year for each eligible student. It is computed as 100% of the first $2,000 of qualified educational expenses, and 25% of the next $2,000. Qualified educational expenses generally include tuition, fees, and course materials, but not room and board, books (unless required for enrollment), student health fees or transportation. Expenses are reduced by any scholarships, grants, or employer provided educational assistance received by the student. A qualifying student can be the taxpayer, spouse, or dependent enrolled at least half-time in a degree program at a college or university. There is a 40% refundable portion of this credit. Note that the credit phases out when a single taxpayer’s adjusted gross income exceeds $80,000 ($160,000 for married filing joint) and is eliminated when AGI reaches $90,000 ($180,000 MFJ). Another important point is that the AOTC may not be taken by married taxpayers filing separate returns.
The Lifetime Learning Credit is allowed up to a maximum of $2,000 per taxpayer per year. It is computed as 20% of the first $10,000 of qualified educational expenses for all eligible students. Qualified expenses are the same as for the AOTC above, except materials and textbooks qualify also if they are required to be purchased from the university. Also like the AOTC, a qualifying student can be the taxpayer, spouse, or dependent, however, there is no requirement for at least half-time enrollment or a degree program. This credit is not refundable, and phases out between $55,000 and $65,000 of AGI for single taxpayers, or $110,000-$130,000 for married filing joint. As with the AOTC, taxpayers who are married filing separate returns cannot take this credit.
One item to consider is that if the student is a dependent child, the child can file a separate return and claim the credit themselves. Higher income taxpayers who would reach the AGI phaseout amounts can waive claiming the child as a dependent, allowing the child to file a separate return and claim the education credit, assuming they have enough tax liability for the credit to offset. The child is not eligible for the refundable portion of the AOTC. The child is also not entitled to claim a personal exemption on their own return.
Another consideration is coordination of these credits with educational savings accounts, such as Coverdell accounts, Qualified Tuition Programs, 529 plans, Series EE bonds, or educational IRAs. Please consult your tax advisor to determine the most favorable tax treatment of any qualified educational expenses.