Education Tax Credits
Article ID: GEN80424
The Government provides incentives for obtaining more education through the American Opportunity Credit and the Lifetime Learning Credit.
The American Opportunity Credit is available to taxpayers for the first four years of college.
Taxpayers eligible to claim the credit can also benefit from:
- Up to a $2,500 education credit per eligible student.
- Higher income limits than the Lifetime Learning Credit and the former Hope Credit.
- 40% of the credit is refundable, which means you may receive up to a $1,000 refund even if you don't owe any taxes.
You may have the following questions about the American Opportunity Credit……….
With the Lifetime Learning Credit there is no limit on the number of years that can be claimed for each student so it is also available to graduate students.
Some of the other benefits of the credit include:
- Up to $2000.00 per tax return
- Available even if a student takes one class
- Available to students even if not pursuing a degree
You may have the following questions about the Lifetime Learning Credit……….
Education deductions for 2012 include:
These tax breaks have different qualifications and benefits.
Who is eligible to take the American Opportunity Credit?
There are a few requirements necessary to qualify for the American Opportunity Credit as follows:
- You paid qualified education expenses for higher education.
- You paid education expenses for eligible students.
- Eligible student is you, your spouse, or dependent for whom you claim an exemption.
- Your modified adjusted gross income is less than $90,000($180,000 if married filing jointly).
You are not eligible to claim the American Opportunity Credit if any of the following applies:
- Your filing status is Married Filing Separate.
- Taxpayer is listed as a dependent in the exemption section on another person’s return.
- You and your spouse were non-resident aliens.
What expenses qualify for the American Opportunity Credit and which ones do not?
The following expenses qualify for the American Opportunity Credit:
- Expenses paid for yourself, spouse, or dependent you claim as an exemption your return.
- Qualified education expenses which are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
- Student-activity fees, but only if the fees are paid to institutions as a condition of enrollment.
- Expenses paid for books, supplies, and equipment needed for course of study included whether or not purchased from the educational institution.
The following expenses do not qualify for the American Opportunity Credit:
- Medical expenses(including student health fees)
- Room and board
- Transportation or
- Similar personal, living, or family expenses.
This is the case even if the above expenses are paid to the institution as a condition of enrollment or attendance.
What is an eligible institution?
An eligible institution is any college, university, vocational school, or post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education.
Virtually all accredited public non-profit, proprietary (privately-owned profit-making) post- secondary institutions.
Who is an eligible student?
The following are necessary to be considered an eligible student:
- Student did not have expenses that were used to figure an American Opportunity Credit in any four earlier years.
- Student had not completed first four years of post-secondary education before the beginning of the year.
- Student must have at least one academic period beginning during the year.
- Student must be enrolled at least half-time in a program leading to a degree,certificate, or other recognized credential.
- No conviction of federal felony for possessing or distributing a controlled substance.
What form or statement will I receive indicating the expenses I paid for education?
You should receive Form 1098-T from an eligible institution by February 2011. An institution may choose to report either payments received (box 1), or amounts billed (box 2).
Again, don’t worry about how to figure out the education credit. Turbo Tax easily handles this type of calculation for you.
Does an MBA or graduate school qualify?
Unfortunately, the American Opportunity Credit is available only for the first four years of college.
However, you may qualify for the Lifetime Learning Credit as there is no limit on the amount of time you can claim education credits under that credit.
Can I claim American Opportunity Credit for expenses paid with borrowed funds?
You can claim an American Opportunity Credit for qualified education expenses paid with proceeds of a loan. Use the expenses to figure the American Opportunity credit for the year expenses are paid, not the year the loan was repaid.
Can both my dependent and I claim the American Opportunity Credit?
Either you or your dependent has to claim the American Opportunity Credit for qualified education expenses, but not both of you.
If you claim your dependent as an exemption on your tax return then you can claim the education credit. If not, the dependent claims the credit even if you paid the expenses.
What if someone such as a relative pays the expense?
A relative may make payments directly to an eligible educational institution, but the student is treated as receiving the payment and paying the institution; therefore, the student gets to claim the education credit.
If the parent claims an exemption for the student, they are considered to have paid the expenses and will reap the benefits of the education credit.
Can I claim the American Opportunity Credit for classes I've withdrawn from?
Yes, you can claim the American Opportunity Credit for qualified education expenses not refunded to you upon withdraw.
Can I take the American Opportunity Credit and the Lifetime Learning Credit both at the same time?
No, there are no double benefits allowed. You cannot claim both credits based on the same qualified expenses.
Who is eligible for the Lifetime Learning Credit?
You are eligible to claim the Lifetime Learning Credit if all of the following requirements are met:
- You paid qualified education expenses for higher education.
- You paid the education expenses for an eligible student.
- The eligible student is you, your spouse, or a dependent for which you claim an exemption on your tax return.
- Your modified adjusted gross income is less than $62,000($124,000 if you are married filing jointly).
What expenses qualify for Lifetime Learning Credit?
Generally, if you paid for qualified education expenses for an academic period beginning in the year or in the first three months of the next year then you are allowed to take the Lifetime Learning Credit.
Qualified expenses are tuition and certain related expenses required for enrollment at an eligible institution. The course must be either part of a post secondary degree program or taken by the student to acquire or improve job skills.
Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses are paid to the institution as a condition of enrollment or attendance.
Can I claim the Lifetime Learning Credit for expenses paid with student loans?
Yes, you can claim a Lifetime Learning Credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the Lifetime Learning Credit for the year in which the expenses are paid, not the year in which the loan is repaid.
Can you take the Lifetime Learning Credit for every year you are in higher education?
One of the advantages of the Lifetime Learning Credit is that you can take the credit every year for higher education as long as you meet the qualifying requirements.
Why isn't all of the Lifetime Learning Credit showing up on my tax return?
There are a few reasons you may not be getting all of the Lifetime Learning Credit.
First, the maximum amount of Lifetime Learning Credit you can claim is 20% of the first $10,000 of qualified education expenses you paid for all eligible students, which is $2,000. This is called the tentative credit. If your modified adjusted gross income is between $52,000 and $62,000($104,000 to $124,000 if married filing joint) then your income is within the range where the credit is reduced.
Also, since this is not a refundable credit, the credit can't be more than your tax liability.
Don’t worry about making this complicated calculation. Turbo Tax can easily handle these calculations for you.
Do you have to be full-time in a degree program for the Lifetime Learning Credit?
This is another advantage of the Lifetime Learning Credit. You can take advantage of the credit whether you are taking one course or more.
Can both my dependent and I claim the Lifetime Learning Credit?
Either you OR your dependent can claim a Lifetime Learning Credit for your dependent’s education expenses but not both of you.
In order for you to claim a Lifetime Learning Credit for your dependent’s expenses, you must also claim an exemption for your dependent.
Even if expenses were paid by your dependent, you still get to claim the credit if you claimed an exemption on your taxes for the eligible student.
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