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Income Tax: Know Your Education Credits

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Did  you, your spouse or dependents going to college in 2015? You may be eligible for education credits when you file an income tax return. (The credit is available through tax year 2017.)

There are two types of credits: American Opportunity Credit and the Lifetime Learning Credit. Before I explain what these two types of credits can do for you, let's see which one you are qualified for.

American Opportunity Credit qualifications:

(1) You are enrolled in a program leading toward a degree (associate or bachelor), or a certificate (beyond high school).
(2) You take at least a half-time course load -- if full time means taking 16 semester credit hours, you must be taking at least eight semester credit hours. If you are not sure, ask your college admissions office.
(3) You have never been convicted of a federal or state felony for a drug offense.
(4) Your modified adjusted gross income is less than $90,000 ($180,000 if married, filing jointly).

American Opportunity Credit benefit:

  • Up to a $2,500 education credit per eligible student. $1,500 is to reduce your income tax, and $1,000 is a refundable credit. Example:
    • If your tax liability is $1,800, the first $1,500 credit will be used to reduce the tax liability ($1,800 - $1,500 = $300). Furthermore, the other $1,000 will also be used to reduce the remaining $300 ($1,000 - $300 = $700). What's left is $700 and that will be refunded to you.
    • If your tax liability is zero, then you will not get the $1,500 credit, but the $1,000 credit will be your refund.
  • You, your spouse and qualified dependents can all benefit from the American Opportunity Credit benefit as long as you all met the requirements.

If you are taking less than a half-time course load, you might be able to claim Lifetime Learning Credit.

Lifetime Learning Credit qualification:

As the name implies, this is a lifelong credit, and one of its advantages is that you can take the credit every year for higher education. Either you OR your dependent can claim Lifetime Learning Credit but not both of you.

Some of the other benefits of the credit include:

  • Maximum credit is $2,000.00 for every tax year
    • If you paid $10,000 for tuition, books, fees and other qualified tools and equipment to complete the course, you can deduct 20% ($10,000 x 20% = $2,000) and report the $2,000 on your 1040
  • Available even if you take one class
  • Available to graduate students
  • The eligible student can be you, your spouse or a dependent for which you claim an exemption on your tax return;
  • Your modified adjusted gross income is less than $63,000 ($127,000 if you are married filing jointly).

Helpful Tips:

1. Did you, your spouse or your qualified dependent go to college in 2012 and 2013? Did you claim the education benefit? Not sure? You can find it in your income tax return (1040). If you missed out claiming the benefit, you need to file a form 1040X, amendment, with the IRS within three years after the due date of your original return. The credit could be too late for 2011 unless you filed an extension.
2. The school you attend must be an accredited school/institute certified by the Department of Education. It is required to issue a Form 1098-T before February 15.

    • The 1098-T form shows how much you were billed and paid to the school for the prior year; how much scholarship was awarded to you, and if your enrollment was at least half-time. It also shows if you enrolled as a graduate student. A copy is sent to the IRS, and a copy to you.
    • If you don't receive a 1098-T from your school by February 15th, check with the admissions office.

If you have questions about the education benefits mentioned above, and not sure which one you're qualified for, email LHAVRO@gmail.com.

-- Lian Havro is a tax adviser with a BA in business management, and a MBA specialized in accounting. She was a chief accountant for profit and non-profit organizations for more than 10 years, and now manages her own accounting services for small businesses. She is a tax accountant specializing in military families, home-based entrepreneurs, and college education credit and non-refundable cash from IRS for (at least) part-time students.

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