You may be able to turn part of the higher education expenses you pay for yourself, your spouse, or your dependents into tax savings. You can do this by claiming the American Opportunity tax credit (AOTC) and the Lifetime Learning credit for tuition and related expenses.
American Opportunity tax credit (AOTC), Lifetime Learning credit. The maximum AOTC you may claim is $2,500 per student for the first four years of undergraduate education at an eligible educational institution. That's 100% of the first $2,000 of higher-education tuition and related expenses plus 25% of the next $2,000 of those expenses.
The maximum Lifetime Learning credit that may be claimed is $2,000 per year per taxpayer, for any post-high school education (including graduate-level courses and courses to acquire or improve job skills) at an eligible educational institution.
Generally, eligible educational institutions are accredited schools offering credit toward a bachelor's or associate's degree or other recognized post-high school credential, and certain vocational schools.
The AOTC is available only for the qualified tuition and related expenses of an eligible student. This is a student who's enrolled at least half-time in a degree or certificate program at an eligible educational institution, and who has never been convicted of a federal or state felony drug offense. The Lifetime Learning credit isn't subject to the eligible student/felony drug offense restrictions, and may be available for a student taking only one course.
Neither credit is allowed for an expense that's otherwise deductible (for example, as a business expense).
A taxpayer may claim an AOTC or a Lifetime Learning credit for a tax year and exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account (formerly called an education IRA) for the same student. However, the credit and the exclusion can't both be claimed for the same expense.
Similarly, you may claim an AOTC or Lifetime Learning credit for a tax year and also exclude from gross income amounts distributed (both the principal and the earnings portions) from a qualified tuition program (also known as a 529 plan) on behalf of the same student, as long as the credit and the exclusion aren't claimed for the same expense.
The AOTC and Lifetime Learning credit may not be claimed in the same tax year for the same expenses, but each may be claimed for different expenses. For example, in the same tax year, a taxpayer may claim the AOTC for the qualified tuition and related expenses of one or more qualifying dependents, and may claim the Lifetime Learning credit for the qualified tuition and related expenses incurred for himself.
In order to be eligible for the AOTC or the Lifetime Learning credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in January of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.
In addition, to claim the credits, a taxpayer must receive a Form 1098-T payee statement from the educational institution. For purposes of this requirement, if a person the taxpayer claims as a dependent receives the Form 1098-T, the statement is treated as received by the taxpayer.
The Lifetime Learning credit is nonrefundable—i.e., it can reduce regular income taxes to zero but can't result in the receipt of a refund. The credit may be claimed against the alternative minimum tax (AMT).
The AOTC, on the other hand, is 40% refundable. This means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government. In addition, the AOTC may be claimed against a taxpayer's AMT.
If the expenses on which the AOTC/Lifetime Learning credits are based are later refunded, the credits may have to be recaptured—i.e., the tax for the refund year may be increased to account for a recomputed credit for the earlier year.
The AOTC/Lifetime Learning credits are based on the payment of “qualified tuition and related expenses.” These are the expenses for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include student activity fees, athletic fees, insurance, room and board, transportation costs and other personal living expenses. They also don't include courses involving sports, games, or hobbies, unless they're part of the student's degree program. Books are qualified expenses under the AOTC, but not the Lifetime Learning credit.
The amount of qualified tuition and related expenses taken into account in computing the AOTC/Lifetime Learning credits must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.
Both credits are phased out for higher-income taxpayers. The AOTC is phased out for couples with income between $160,000 and $180,000, or singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out for couples with income between $116,000 and $136,000 in 2019 ($114,000 and $134,000 for 2018), or singles with income between $58,000 and $68,000 in 2019 ($57,000 and $67,000 for 2018). (The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.)
Neither credit is available for taxpayers who are married filing separately.
Eligibility for the credits is subject to a number of technical requirements not discussed above. Please give me a call if you would like to discuss your eligibility for these credits and how to claim them.