If you plan on claiming one of the IRS educational tax credits, be sure to fill out a Form 8863 and attach it to your tax return. These credits can provide a dollar-for-dollar reduction in the amount of tax you owe at the end of the year for the costs you incur to attend school. Before preparing the form, however, make sure that you satisfy the requirements of an eligible student.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Claiming the American Opportunity credit
The American Opportunity credit can reduce your tax liability by up to a $2,500 for educational expenses you or a dependent student incur during the first four years of post-secondary schooling.
The credit is calculated based on the amount you pay for tuition, fees, books and supplies required for the coursework. The credit is only available to students who enroll at least half-time for one or more academic semesters during the tax year and are pursuing a degree or other recognized credential. To claim the credit, your Modified Adjusted Gross Income (MAGI) for 2020 must be below $90,000 if filing individually, or $180,000 if married filing jointly.
Claiming the Lifetime Learning credit
The Lifetime Learning credit can reduce your tax liability by up to $2,000 for the cost of enrollment in a post-secondary school. The expense of books and other supplies are not covered by this credit unless the school requires it as a condition of enrollment and you pay the school directly for these items.
This credit provides more flexibility, as it only requires the student be enrolled in at least one course during the tax year. The course need not be part of a degree program; taking just one course to enhance job skills qualifies you to claim the credit. This tax credit is only available to taxpayers with a 2020 MAGI below $69,000 if filing individually, or $138,000 if married filing jointly.
Calculating your MAGI
MAGI is based on your Adjusted Gross Income (AGI). Your AGI is essentially all gross income minus certain deductions such as moving expenses, IRA and health savings account contributions, alimony payments, student loan interest and educator expenses. For most taxpayers, MAGI is equal to the AGI you calculate on the first page of Form 1040. However, taxpayers who live and work abroad must increase AGI by the amount of foreign earned income and housing they exclude from taxable income to arrive at MAGI.
Preparing Form 8863
If you are eligible for either of the educational credits, the two-page Form 8863 can be completed with minimal time and effort. After entering the student’s name and Social Security number, a simple calculation determines the credit you can claim. The American Opportunity credit equals 100 percent of the first $2,000 in expenses plus 25 percent of the excess. For the Lifetime Learning credit, you simply multiply your eligible expenses, up to $10,000, by 20 percent.
Remember, if you file with TurboTax, we’ll ask simple questions and recommend the credit that gives you the biggest savings. We’ll also fill in all the right forms for you.