School Days and Money Back

Since the school year has just about started for everyone out there, I wanted to remind you all of the two college education credits that will be available when filing your 2015 tax return.  The American Opportunity Credit or Lifetime Learning Credit is available to individuals paying for the qualifying education expenses of eligible students.  Let’s start out with the credit amounts.

The American Opportunity Credit was a reworking of an existing credit known as the Hope Scholarship Credit.  The remodel consisted of expanding the boundaries of the older Hope and allowing a portion of the credit to become refundable, up to $1000.  In 2012, congress extended the availability of this credit until 2017.  An eligible student can claim a credit of up to $2500.  The credit is calculated by taking the sum of 100% of the first $2000 of qualified expenses and 25% of the next $2000 ($500) of qualified expenses.  40% of this credit is refundable, so even if the taxpayer owes no tax they are eligible to receive $1000  per student.  This credit is only available to an eligible student for four years.  One benefit of this credit is that it is available for each student on the return; unlike the Lifetime Learning Credit which has a maximum credit per return.

The Lifetime Learning Credit provides a credit of 20% of the amount spent on eligible expenses up to $2000.  This credit is not refundable, therefore not a benefit to those without sufficient tax liabilities.  The student is not required to be a half time student, but the course must be part of a post-secondary degree program or taken to maintain or improve job skills.

There are income limitations for each of these credits.  For the American Opportunity Credit the amount begins to phase out at $160,000 MAGI for joint filers and $80,000 MAGI for all others.  It completely phases out at $180,000 MAGI for joint filers and $90,000 MAGI for all others.  The Lifetime Learning Credit comes with a lower threshold, phasing out at $110,000/$55,000 MAGI for joint filers and the rest respectively.  Complete phase out occurs at MAGI of $130,000/$65,000.  MAGI is an acronym for Modified Adjusted Gross Income.

The institution will provide a 1098-T form to the student by January 31st.  This form is now required by the IRS to claim the credit, expect a notice in the future for claiming the credit without a 1098-T being provided.  Eligible expenses paid to an eligible college, university or vocational school can be claimed for the credit.

These expenses include:
•    Tuition
•    Fees and other related expenses required for enrollment or attendance.
•    Student activity fees required to enroll or attend the school.

The following expenses that are only allowed for the American Opportunity Credit if the student needs them for a course of study:
•    Books
•    Supplies
•    Equipment

These expenses are not qualified even if they were paid to enroll or attend the school:
•    Room and Board
•    Insurance
•    Medical Expenses (Student Health fees)
•    Transportation
•    Similar personal, living or family expenses

For parents and students who are eligible for these credits you may consider some advanced tax planning.  If you are approaching the phase-out limits you may want to contribute more to your 401k or IRA to lower your income.  Or you may change your W4 to reduce the amount of tax withheld from your paycheck.

I hope this helped.

David Hilliard can be reached for questions at (714)-921-2790 or at