CARL WATTS & ASSOCIATES

September 14, 2015

www.carlwatts.com
office@carlwatts.com
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Colleges have already opened their gates for yet another year, and so have your bank accounts to provide the hard-earned money necessary for your own or your children education expenses.

It is common knowledge that college education is expensive; statistics show an average of $20,300 annual expenses for tuition, room and board, and the amount is for school year 2012-2013.

Therefore, it is important for you to know that, if you, your spouse or a dependent are heading off to college, some of your costs may save you money at tax time.

You may be able to claim a tax credit on your federal tax return.

Under the Internal Revenue Code provisions, there are two tax incentives for college education: the American Opportunity Tax Credit and the Lifetime Learning Credit. You will find below a summary of what you need to know about the two education credits.

The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any taxes.

The Lifetime Learning Credit (LLC) is worth up to $2,000 on your tax return. There is no limit on the number of years that you can claim the LLC for an eligible student, but the credit is not refundable.


There are, of course, a series of eligibility requirements for the student, as well as for the person claiming the credits.

To be eligible for AOTC, the student must:

  • Be pursuing a degree or other recognized education credential;
  • Be enrolled at least half time for at least one academic period beginning in the tax year;
  • Not have finished the first four years of higher education at the beginning of the tax year;
  • Not have claimed the AOTC or the former Hope credit for more than four tax years;
  • Not have a felony drug conviction at the end of the tax year.


An eligible student for LLC must:

  • Be enrolled or taking courses at an eligible educational institution;
  • Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills;
  • Be enrolled for at least one academic period beginning in the tax year.

Eligible educational institutions  are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.

To claim the full AOTC, your MAGI (modified adjusted gross income) must be $80,000 or less ($160,000 or less for married filing jointly). You will receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

To claim a LLC, you must meet all three of the following:

  1. You, your dependent or a third party pay qualified education expenses for higher education;
  2. You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible education institution;
  3. The eligible student is yourself, your spouse or a dependent you listed on your tax return.
Tax Credits
for College Education
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To claim the full LLC, your MAGI must be $52,000 or less ($104,000 or less for married filing jointly). If your MAGI is over $52,000 but less than $62,000 (over $104,000 but less than $124,000 for married filing jointly), you receive a reduced amount of the credit. If your MAGI is over $62,000 ($124,000 for joint filers), you cannot claim the credit.

You cannot claim a credit for education expenses paid with tax-free funds. You must reduce the amount of expenses paid with tax-free grants, scholarships and fellowships and other tax-free education help.

Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period that starts during the tax year or the first three months of the next tax year.

Eligible expenses also include student activity fees you are required to pay to enroll or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.

For AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.

There are expenses that are not qualified education expenses, even if you pay the them to enroll or attend the school.

These include: room and board, insurance, medical expenses (including student health fees), transportation, and similar personal, living or family expenses.

In most cases, you should receive Form 1098-T, Tuition Statement, from your school by Feb. 1, 2016 for the current year. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don’t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year.


To claim the credits, you must complete Form 8863 and attach the completed form to your Form 1040 or Form 1040A.

You can claim only one type of education credit per student. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For instance, you can claim the AOTC for one student, and claim the LLC for the other.

You can claim the credits for any amounts not refunded even if the student withdraws.

You cannot claim either of the credits if:

  • Someone else, such as your parents, list you as a dependent on their tax return;
  • Your filing status is married filing separately;
  • You already claimed or deducted another higher education benefit using the same student or same expenses;
  • You (or your spouse) were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes.


On the IRS website you can find an interactive app, "Am I Eligible to Claim an Education Credit?" that may help you determine if you are eligible for education credits and deductions.

To make sure that you take full advantage of any credit that may apply to your particular situation, is is our constant advice that you enroll help from a tax professional.