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Back to School Tax Breaks

It is that time of year again when every store and business is promoting deals for the start of a new school year, vying for your business selling things students need and want from supplies and books to software and computers. The tuition bills will be due soon. No doubt about it, college is expensive but there are some tax breaks available in the form of credits and deductions that can help if you qualify. Here are the three biggest education incentives and tips to qualify:

American Opportunity Credit: This is the best credit if your student is in his or her first four years of undergraduate education and enrolled at least half-time in a degree program. The credit is worth up to $2,500 per year, computed as 100% of the first $2,000 of expenses and 25% of the next $2,000. Eligible expenses include tuition and fees, books, supplies and equipment. In order to claim the full or partial credit, taxpayers must have modified adjusted gross income between $160,000 – $180,000 (married filing jointly) and $80,000 – $90,000 (single or head of household). If income exceeds these limits, depending on the circumstances, families may still benefit from this credit by shifting the credit to the student and forgoing the parents’ dependency deduction.

Lifetime Learning Credit: The Lifetime Learning credit is available for both undergraduate and graduate programs, both degree and non-degree programs and there is no minimum credit hour enrollment requirement as with the American Opportunity credit. The credit can be claimed for multiple years for eligible expenses (tuition and fees, books, supplies and equipment.) However, the maximum credit caps at $2,000 and is calculated on 20% of the first $10,000, so taxpayers have to spend the full $10,000 to fully claim it. The adjusted gross income limits are also lower at $110,000 – $130,000 (married filing jointly) and $55,000 – $65,000 (single or head of household). As with the American Opportunity credit, if income exceeds these limits, depending on the circumstances, families may still benefit by shifting the credit to the student.

If a parent is eligible to, but does not, claim the student as a dependent then the student may claim the education credit. Of course the student needs to owe tax to benefit but a credit is a dollar for dollar reduction in tax so the benefit can be the same for the student as the parent. A student could offset tax from investment income and income subject to the kiddie tax. This strategy may not work for every family but for some this can fit with their family tax planning. A family with a few eligible children could reap a benefit over all the college years.

Tuition and Fees Deduction: As an alternative to the education credits, taxpayers may be able to deduct eligible expenses for undergraduate and graduate programs up to $4,000. The credit phases out if adjusted gross income exceeds $160,000 (married filing jointly) or $80,000 (single or head of household).   This deduction can only be taken if no education credits are claimed and normally applies when the taxpayer does not qualify for the other credits.

Additional Tips:

Be sure to obtain a 1098-T, Tuition Statement, from the educational institution. This shows the payments you made during the year. Beginning in 2016, taxpayers must supply the EIN from this statement on their tax return in order to claim the American Opportunity Credit.

Qualifying students can include the taxpayer, spouse or dependent.

Amounts paid for books, supplies and equipment are qualified expenses only if paid to the educational institution as a requirement of the program along with tuition.

Your tax professionals at GBQ can discuss these tax breaks with you and guide you towards the best options for your family.

Article written by:
Pam Lynch
Tax Manager