Back-to-School Reminder for Parents and Students: Available College Tax Credits for 2015
August 18, 2015. With another school year just ahead, the IRS today reminded parents and students that now is a good time to see if they will qualify for either of 2-year college tax credits or other education-related tax benefits when they file their 2015 federal income tax returns in April 2016.
In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying educational expenses for an eligible student. Eligible students are defined as the taxpayer, spouse and their dependents. The American Opportunity Tax Credit provides a credit for each eligible student. The Lifetime Learning Credit provides a maximum credit per tax return.
Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.
These credits apply to eligible students enrolled in a college, university or vocational school, including both nonprofit and for-profit educational institutions. The credits are subject to income limits that could reduce the amount claimed on the tax return.
To determine eligibility for these benefits, taxpayers should visit the Education Credits web page or use the IRS’s Interactive Tax Assistant tool. Both are available on IRS.gov. Normally, a student will receive a Form 1098-T for tuition from their school by January 31st of the following year. This form will show the tuition paid or billed along with additional useful information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to fill out Form 8863 and Publication 970 for details on properly calculating allowable tax benefits.
Many taxpayers eligible for the American Opportunity Tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:
The credit is only available for four tax years per eligible student.
The credit is available only if the student has not completed the first four years of post-secondary education before 2015.
Here are some more key features of the credit:
- Qualified education expensesare amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room, board, etc., do not qualify.
- The credit equals 100% of the first $2,000 spent and 25% of the next $2,000. That means the full $2,500 credit may be available to a one who pays $4,000 or more in qualified expenses for one student.
- Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.
- The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for people with incomes higher than these amounts. No credit can be claimed by joint filers whose MAGI is $180,000 or more and taxpayers filing single, heads of household and widows and widowers whose MAGI equals or exceeds is $90,000.
The Lifetime Learning Credit of up to $2,000 per tax return is granted to both grad and undergrad students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax; it is not refundable.
Although 50% of the time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken to maintain or improve current job skills. Other features of the credit include:
- Tuition and fees required for enrollment qualify, additional expenses do not qualify.
- The credit equals 20% of the amount spent on qualified expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition, fees and has sufficient tax liability to absorb.
- Income limits are lower than under the American Opportunity Tax Credit. For 2015, the full credit can be claimed by single taxpayers with MAGI is $55,000 or less. For married filing jointly, the limit is $110,000. The credit is phased out for people with incomes higher these thresholds. No credit can be claimed by taxpayers with MAGI of $130,000 or more and singles, heads of household and some widows and widowers with MAGI of $65,000 or more.
Eligible parents and students can benefit from these credits during the year by having less taxes withheld from their paychecks. They can file a Form W-4 with their employers, claiming additional withholding allowances. There are a variety of other education-related tax benefits that many benefit taxpayers:
- Scholarship & fellowship grants; generally tax-free if used to pay for tuition, fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
- Student loan interest deduction of $2,500 per year.
- Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 year of age.
- Qualified tuition programs, also called 529 plans, used by many taxpayers to prepay or save for children’s higher education.
Taxpayers with qualifying children who are students up to age 24 may claim a dependent exemption and the Earned Income Tax Credit.
The general comparison table in Publication 970 can be a very useful tool for taxpayers in determining eligibility for these benefits. More details on these benefits may be found in the Tax Benefits for Education Information Center on IRS.gov.
Zaher Fallahi, Tax Attorney, CPA, is an International Tax Attorney, and advises taxpayers including Americans Living Abroad and Non-Resident Aliens subject to the US tax law, in resolving their tax controversies with their Offshore Voluntary Disclosure Program (OVDP), Report of Foreign Bank and Financial Accounts (FBAR), Foreign Account Tax Compliance Act (FATCA) and Foreign Trust. The firm handles Offer-In-Compromise and non-filed income tax returns. Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail [email protected]