If you are putting a child—or yourself—through school, you know that education isn’t cheap. Yet taxpayers sometimes overlook valuable education tax credits that can save you thousands of dollars and help take the sting out of those tuition bills.
On the federal level, two valuable tax credits are available: The American Opportunity Credit and the Lifetime Learning Credit. Note that credits are distinct from deductions, and can make a bigger impact on your tax savings. Deductions reduce your taxable income, which may or may not translate into a lower final tax bill. A credit, on the other hand, is subtracted directly from your final amount owed.
The American Opportunity Credit, which is available through the 2017 tax year, is worth $2,500. And up to 40% of the total is refundable, which means you could receive a refund of as much as $1,000. That’s the case even if you don’t owe any taxes.
The full credit is available to single filers earning up to $80,000 and couples earning up to $160,000. A reduced credit is available for individuals making up to $90,000 and couples earning up to $180,000. Note that the American Opportunity Credit can only be applied toward expenses paid during the first four years of college.
That’s where the Lifetime Learning Credit comes in. The credit can be applied to undergraduate, graduate and professional degree courses. Qualifying taxpayers can receive a credit of up to $2,000 per student, although the credit cannot exceed the amount of tax you owe on your return. The credit can be claimed by single filers earning less than $60,000 or joint filers earning up to $120,000.
If you have one child in college, you must choose whether to claim the American Opportunity Credit or the Lifetime Learning Credit each year. Those with more than one college student in the family, however, can use both: You might use one for your son and the other for your daughter, for example.
Keep in mind that you cannot claim these credits for a dependent if you also plan to use the tuition and fees adjustment (which is taken as an adjustment to income) for that student. However, you’re entitled to the credits even if you took a distribution from a Coverdell Education Savings Account, as long as money from the Coverdell, or from a qualified tuition program, isn’t used for the same expenses you’re claiming for education credits.
Be sure to take advantage of any state tuition credits as well. In Arizona, for example, credits are available for extracurricular activities on the K-12 level. Parents (or grandparents for that matter) can receive credits when they help pay for things like band uniforms, sports equipment, lab materials or trips to competitive events such as spelling bees.
If you would like help reviewing your tax-saving opportunities, we may be able to help. That’s just part of what we do.