Education Tax Credits
posted Feb 15, 2013 in the Global Tax Blog
If you or a dependent is a student you may be able to significantly reduce your tax liabilities by applying for education tax credits. Education tax credits can be claimed in the form of two higher education credits, the American Opportunity Tax Credit and the Lifetime Learning Credit. To report these credits, taxpayers should use Form 8863.
Q: Who is qualified to claim an Education Credit on their return this year?
You may be able to claim an education credit if you, your spouse, or a dependent claimed on your tax return was a student enrolled at or attending an eligible educational institution. The credits are based on the amount of adjusted qualified education expenses paid for or by the student in 2012 for academic periods beginning in 2012 or beginning in the first three months of 2013.
Q: What is an academic period?
An academic period is defined by the IRS as any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible education institution.
Q: What is the American Opportunity Tax Credit (Formerly the Hope Credit)
The American Opportunity tax credit is a credit of up to $2,500 (an increase from $1,800) for qualified education expenses and up to 40% is refundable. This credit can be claimed for any of the first four years of college. Unfortunately, post graduate work does not apply, but the Lifetime Learning Tax Credit can be used for that. The student must meet the required qualifications and certain income restrictions apply (see the chart below).
This credit can be used for:
- Tuition & fees
- Course materials
Q: What is the Lifetime Learning Tax Credit
This credit equals 20% of qualified education expenses, up to a maximum of $10,000 of qualified expenses (maximum credit is $2,000 per year) for qualified tuition and related expenses.
The student must meet the required qualifications and certain income restrictions also apply (see the chart below).
This credit can be used for tuition and fees for attendance at any:
- Vocation School
- Postsecondary Education Institution
Comparison of Education Credits
Caution. You can claim both the American opportunity credit and the lifetime learning credit on the same return-but not for the same student.
|American Opportunity Credit||Lifetime Learning Credit|
|Maximum credit||Up to $2,500 credit per eligible student||Up to $2,000 credit per return|
|Limit on modified adjusted gross income (MAGI)||$180,000 if married filing jointly;|
$90,000 if single, head of household, or qualifying widow(er)
|$124,000 if married filing jointly;|
$62,000 if single, head of household, or qualifying widow(er)
|Refundable or nonrefundable||40% of credit may be refundable; the rest is nonrefundable||Nonrefundable—credit limited to the amount of tax you must pay on your taxable income|
|Number of years of postsecondary education||Available ONLY if the student had not completed the first 4 years of postsecondary education before 2012.||Available for all years of postsecondary education and for courses to acquire or improve job skills|
|Number of tax years credit available||Available ONLY for 4 tax years per eligible student (including any year(s) Hope credit was claimed)||Available for an unlimited number of years|
|Type of program required||Student must be pursuing a program leading to a degree or other recognized education credential||Student does not need to be pursuing a program leading to a degree or other recognized education credential|
|Number of courses||Student must be enrolled at least half time for at least one academic period beginning during the year||Available for one or more courses|
|Felony drug conviction||As of the end of 2012, the student had not been convicted of a felony for possessing or distributing a controlled substance||Felony drug convictions do not make the student ineligible|
|Qualified expenses||Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance||Tuition and required enrollment fees (including amounts required to be paid to the institution for course-related books, supplies, and equipment)|
|Payments for academic periods||Payments made in 2012 for academic periods beginning in 2012 or beginning in the first 3 months of 2013|
Education credits can significantly increase your tax savings, however additional restrictions may apply. For help determining if you or a dependent qualify for education tax credits please contact any member of the KLR Tax Services Team or call us at 888-857-8557.