Now that your college students are finally squared away with school transportation, registration, books, supplies, class schedules and dormitory accommodations, it’s a good time to consider whether you will qualify for the various education-related tax benefits available when you file your 2015 income tax returns. There are three options that are designed to help defray the steep and ever-rising costs of post-secondary education – the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC) and the Tuition and Fees Deduction (TFD).
American Opportunity Tax Credit and Lifetime Learning Credit
In general, the AOTC and LLC are available to taxpayers who pay qualifying expenses for an eligible student to an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Eligible students include the taxpayer, spouse and dependents. The AOTC provides a credit for each eligible student, while the LLC provides a maximum credit per tax return. You may qualify for both of these credits, but can only claim one of them for a particular student in any given year. To claim these credits, Form 1040 or 1040A must be filed, together with a completed Form 8863, Education Credits. The credits are subject to income limits that could reduce the amount that can be claimed (see below).
The AOTC provides a maximum annual credit of $2,500 per eligible student for qualified education expenses paid during the entire tax year for the first four tax years of post-secondary education in pursuit of a degree and who is enrolled at least half-time. Up to $1,000 of the AOTC credit is refundable, meaning that you can receive up to $1,000 per eligible student as a refund even if you have no tax liability. For 2015, the full credit is available to all filers (except married filing separately) whose income is below $80,000 ($160,000 if filing jointly) and is reduced for income up to $90,000 ($180,000 if filing jointly). No credit is available for incomes above these levels.
The LLC maximum credit of $2,000 per return can be claimed for an unlimited number of years and does not require the pursuit of a degree. Although the half-time student requirement does not apply to the LLC, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Income limits are lower than under the AOTC. The full credit can be claimed by all taxpayers (except married filing separately) whose income is $55,000 or less ($110,000 for joint filers). The LLC is phased out for taxpayers with incomes above these levels with no credit available for incomes above $65,000 ($130,000 for joint filer). There is no refundable portion of the LLC.
While LLC school-related expenses only include payments for tuition and fees, AOTC qualified expenses include amounts paid for an eligible student’s tuition, fees and other related expenses such as course-related books, supplies and maybe even a computer if it is a requirement of your enrollment for an eligible student (Room and board are not qualified expenses).
You do not have to wait until you file your tax returns to receive these benefits. Eligible parents and students can have less tax withheld from their paychecks by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.
A student will receive Form 1098-T from their institution by Jan. 31 of the following year which shows the amount of tuition paid or billed along with other information. However, such amounts may differ from those eligible to be claimed. You should review the instructions to Form 8863 and Publication 970 to properly figure your allowable tax benefits.
Tuition and Fees Deduction
This deduction can lower your adjusted gross income by up to $4,000. Usually, credits are better than deductions since the former reduces your tax liability, while the latter decreases your taxable income. The TFD is available for an unlimited number of years of higher education and only requires that you be enrolled in one class at an eligible school to qualify.
The TFD expired at the end of 2013, but was extended through the end of 2014. In July 2015, the Senate Finance Committee approved an extender package through 2016 that includes the TFD. The House Ways & Means Committee has also approved several of the extenders. It may be safe to assume, therefore, that the President will act accordingly and that the TFD will be an option on your 2015 tax return.
Which College Tax Benefit is Best for You?
You may claim only one type of benefit for each student on your return, but may claim all three if you have three or more students. In addition, all filing statuses except married filing separately are eligible.
In most cases, the AOTC provides the most bang for your buck. It is more generous than the LLC in that it has higher income thresholds, is partially refundable, includes more school-related costs, and allows for up to a $2,500 credit for each of your students.
The LLC may, nevertheless, be best for you if you or your student is in grad school, is a fifth-year senior, is not pursuing a degree, is not at least a half-time student, or has income above the AOTC thresholds. Also, to be eligible for the AOTC, the student must have no felony drug convictions. So if your kid has been busted for drugs, only the LLC would be available to you.
The TFD, however, may be more valuable to a grad student who is working but doesn’t qualify for the LLC because their income exceeds the LLC single thresholds, but is below the TFD limits.
Regardless of which credit or deduction you claim on your Federal return, you may also be entitled to additional state tax benefits. For example, New York residents have the choice of either deducting up to $10,000 of undergraduate tuition paid for each eligible student as an itemized deduction or claiming up to $400 as a refundable credit. This is in addition to your Federal benefits. So if you paid $12,000 in qualified tuition and claimed the maximum $4,000 TFD as an above-the-line deduction on your 1040, you can use the same tuition to claim the maximum $10,000 as a below-the-line (itemized) deduction on your New York return (attach a completed New York Form IT-272 to your state return).
Other Education-Related Tax Benefits
There are a variety of other education-related tax benefits available including:
- Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials; but taxable if used for room, board, research, travel or other expenses
- Student loan interest deduction up to $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 the time of purchase, was at least 24 years old
- Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education. The amount contributed to a 529 that is established in your resident state may be deductible on your state return
Taxpayers with qualifying children who are students up to age 24 may also be able to claim a dependent exemption and the Earned Income Tax Credit.
If you have any further questions regarding College Tax Credits, feel free to contact Bob Jahelka () or Victor Belgiorno ().