Back to School College Tax Credit

 College Tax Credit

With another school year now already in full swing,
it is a good time for both parents and students to see if they will qualify for one of the two college tax credits when they file their 2014 federal income tax returns next year.
The two college tax credits are American Opportunity Credit (AOC) and Lifetime Learning Credit.

The Differences of these two credits:
In general, these two credits are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The main difference for each credit is as follows:

• The American opportunity credit provides a credit for each eligible student while the lifetime learning credit provides a maximum credit per tax return. Although a taxpayer usually qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. 
• The American opportunity credit will generally yield the greater tax savings for most undergraduate students while the lifetime learning credit should be considered by part-time students and those attending graduate school.  

The American Opportunity Credit:

 American Opportunity Credit

The maximum annual credit amount is $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

• The credit is only available for 4 tax years per eligible student. 
• The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

• Qualified education expenses are amounts paid for tuition, fees and other education related expenses for an eligible student. However, other expenses such as room and board are not qualified expenses.
• The credit equals 100 percent of the first $2,000 spent and 25% of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
• Forty percent of the American opportunity credit is refundable. This means that for those taxpayers who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The Lifetime Learning Credit:

Lifetime Learning Credit

The maximum annual credit amount is $2,000 per tax return for both graduate and undergraduate students. Unlike the American opportunity credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student.

• The lifetime learning credit is not a refundable credit.  It does not provide a benefit to people who owe no tax.
• Although the full-time student requirement does not apply to this credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills.

Other features of this credit include the following:

• Tuition and fees required for enrollment or attendance qualify for this credit.
• The credit equals 20% of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability to claim this credit.
• Income limits are lower than under the American opportunity credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

There are a variety of other education-related tax benefits that can help many taxpayers. They include the following:

• Scholarship and fellowship grants that is generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used to pay for room and board, research, travel or other expenses.
• Student loan interest deduction of up to $2,500 per year.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

In brief, both American Opportunity Credit and Lifetime Learning Credits are available for students enrolled in an eligible college, university or vocational school.  However, none of these credits can be claimed by a nonresident alien, a married person filing a separate tax return or someone who can be claimed as a dependent on another person’s tax return.

These two credits are available to all taxpayers — those who itemize their deductions on Schedule A and those who claim a standard deduction.  These credits are claimed on Form 8863,

If you have any questions, please feel free to email us.

Your comments and feedback are welcome.
Source:  www.irs.gov.

Email:   Excellent-tax@gmx.com