I was just walking through Towson University watching students go back and forth to class and it got me thinking, many of my clients and many of you sent students off to college and paid college tuition bills. While my kids are only 8 and 4 at this point, I have heard the gut-wrenching stories of writing those large tuition checks. While my wife and I are putting away what we can for our kids’ future educations, (A big shout out to our parents and brothers and sisters for helping as well) I am sure I will cringe when I write the checks for college education as well.
College is an investment that should pay off in the future; however, for many graduates and their families, it can also be a financial burden. To help ease that burden, the government offers money to go to college in the form of tax credits. I am not talking about student loans here, that is an entirely different process. Did you know that the government offers two tax credits that can be available if you qualify? While we are bombarded with messages of how to save for a future education, many Americans don’t realize how many programs are available to help and how best to actually make the payments when the tuition is due. In this article, I hope to help provide some guidance.
If your income is above an modified adjusted gross income (MAGI on your tax return) $160,000 if married filing jointly, or $80,000 if filing single there is no need to read on because none of the credits are available to you. But, if you aren’t, be sure to read on… (MAGI for most people is the amount of AGI, adjusted gross income, shown on your tax return. On Form 1040A, AGI is on line 22 and is the same as MAGI.)
Credits, if you qualify are extremely important because this is just like receiving a check from the government for taxes owed. Credits reduce what you owe in taxes dollar for dollar. These are much more powerful than deductions from income. These credits are generally based upon your household income so I will segment this by income levels. You can go to the IRS website here and answer a few questions to see if you qualify.
If your modified adjusted gross income (MAGI on your tax return) is less than $60,000 filing single or $120,000 if filing jointly you can claim at least a partial credit for the following 2 Educational Credits
1) The Lifetime Learning Credit, provided by 26 U.S.C. § 25A(b), is available to United States taxpayers who have incurred education expenses. For this credit to be claimed, the student:
- Must attend school on at least a part-time basis
- Education expenses are incurred by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.
- Must be at an eligible, qualified institution. Click here for a list.
This credit allows for a 20% non-refundable tax credit for first $10,000 of qualified tuition and expenses to be fully creditable against the taxpayer’s total tax liability. The maximum amount of the credit is $2000 per household.
The credit is available for net tuition and fees (less grant aid) paid for post-secondary enrollment. This credit is only available at the family level, not individual student. So, if you have 3 children in college at once (ouch), the credit is only available one time. However, it is available one time for an unlimited period of years. So, if you know any people who attend school for 6-8 years, it can be used each year as long as they are attending at least part-time.
This credit is not applicable for room and board and other incidentals.
The credit amount is phased out gradually once a taxpayer’s modified adjusted gross income (MAGI) exceeds $50,000 ($100,000 if married filing jointly) and the credit is phased out entirely once a taxpayer’s modified adjusted gross income exceeds $60,000 ($120,000 if filing jointly).
2) Second, the American Opportunity Tax Credit is a partially refundable tax credit first detailed in the American Recovery and Reinvestment Act of 2009.
The American Opportunity Tax Credit is a much broader, more powerful tax credit that increased the Hope Scholarship Credit to 100 percent of qualified tuition, fees and course materials paid by the taxpayer during the taxable year up to $2,000, plus 25 percent of the next $2,000. The total credit does not exceed $2500.
Even better, this credit is available on a per-student basis! So, like above, if you had 3 children in college at once, you could claim this credit for all 3 of them in the same year. The catch, if you want to call it that is that it only applies to the first four years of post-secondary education. So, if your son or daughter is on year 5,6 or 7 the credit goes away. Additionally, if the child has a felony drug conviction this credit is not available.
You may notice that this credit also applies to “course materials” or books. So, if you are going to college for free tuition, but have expenses related to course materials you could claim the credit.
This tax credit is subject to a phase-out for taxpayers with modified adjusted gross income (MAGI) in excess of $80,000 individually or $160,000 for married couples filing jointly.
A key point here is that you CANNOT claim both the American Opportunity Credit and the Lifetime Learning Credit in the same year for the same person.