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Student Expenses: Tax Deductions and Credits

May 27, 2019

The price of higher education is a commonly considered financial burden to thousands of individuals on a national scale. Fortunately, a variety of credits and deductions exist that are designed to assist with qualified education expenses.

 

American Opportunity Tax Credit (AOTC)

 

The AOTC is a credit for education expenses (tuition, books, supplies for specific courses, etc.) for an eligible student that is pursuing a degree in higher education. The AOTC is only eligible to be applied to the first four years of higher education. The maximum credit for the AOTC is $2,500. However, if the credit brings your owed tax amount down to zero, you’re only allowed to claim 40% percent of the credit or up to $1,000.

 

To be eligible for the AOTC, one:

  • Must be at an eligible educational institution for at least half-time for one semester.

  • Must be pursuing a degree or other recognized education credential.

  • Must not have completed their undergraduate degree by the beginning of the tax year.

  • May not claim the AOTC for more than four tax years.

  • Must not have a drug felony conviction at the end of the tax years.

  • Must receive a 1098-T from their respective eligible education institution.

 

Limitations:

To claim the full credit, your modified adjusted gross income must be $80,000 or less if the taxpayer is filing as single. If taxpayers are married filing jointly, the modified adjusted gross income must be $160,000 or less to claim the full credit.

You will receive a reduced AOTC if your modified adjusted gross income is more than $80,000 but less than $90,000 when taxpayer files single. A single taxpayer may not claim the AOTC if the modified adjusted gross income is more than $90,000. If taxpayers are married filing jointly, they will receive a reduced AOTC if their modified adjusted gross income is more than $160,000 but less than $180,000. Married filing jointly taxpayers may not claim the AOTC if the modified adjusted gross income is more than $180,000.

 

Lifetime Learning Credit (LLC)

 

The LLC is another education expenses credit for eligible students attending an institution. There is no limit on how many years you can claim this credit. The threshold is up to $2,000 every tax year. An important consideration of the LLC is that it is not refundable. This means you can use the credit to pay any tax that you owe but you won’t get any of the credit back as a refund

 

To be eligible for the LLC, one:

  • Must be taking courses or be enrolled at an eligible educational institution.

  • Must have to be taking higher education course(s) to obtain a degree, recognized education credential or to get/improve job skills.

  • Must be enrolled for at least one academic period (semester, trimester, quarter, summer session or any other period their institution chooses) at the beginning of the tax year.

  • Must receive a 1098-T from their institution.

 

Limitations:

By the time the tax year ends, the amount of your LLC is gradually phased out if your modified adjusted gross income is between $57,000 - $67,000. It is phased out between $114,000 - $134,000 if you are filing a joint return.

You are unable to claim the credit if your modified adjusted gross income is more than $67,000 or is more than $134,000 for filing jointly.

 

Student Loan Interest Deduction

 

This is Interest that a taxpayer pays on a qualified student loan during the current tax year. A qualified student loan is a loan taken out to pay for higher education expenses. The expense must be for you, your spouse, or a dependent when the loan was taken out for the higher education expenses.  

 

To be eligible:

  • The taxpayer legally has to pay the interest on the student loan.

  • One’s modified adjusted gross income has to be less than the annually set threshold to claim the deduction.

  • If married filing jointly, you or your spouse may not be claimed as a dependent on another return.

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