An Opportunity to Recoup Some of the Expenses of Higher Education
American Opportunity Credit
Of the two credits, the American Opportunity Credit provides the most benefits. It also is the most restrictive in its requirements. The American Opportunity Credit is only available for the first 4 years of post-secondary
education and is only available for 4 years. The student must be enrolled at least half time in one semester during the tax year and be pursuing a degree or recognized education credential. The student cannot have been convicted of a felony for drug possession or distribution. There is also an income limitation that starts to phase out at $160,000 and eliminated at $180,000 of modified adjusted gross income(MAGI) for married filing jointly or starting at $80,000 and eliminated at $90,000 for single, head-of-household or qualifying widow(er).
Assuming the student meets these requirements, the credit amount is limited to $2500 per qualifying student. The credit amount is 100% of the first $2000 in qualifying expenses and 25% of the next $2000. The credit is 60% non-refundable, meaning this portion can only reduce the income tax to 0. The refundable portion of 40% can result in a refund to the taxpayer.
Qualifying expenses include tuition, fees and required materials and equipment. These materials do not need to be purchased from the educational institution as a requirement of enrollment.
Lifetime Learning Credit
The Lifetime Learning Credit, as the name implies, has no restrictions on the years available. There is no requirement to be degree-seeking or minimum enrollment percentage. Drug felonies do not disqualify the student. The income limitations are stricter than the American Opportunity Credit, with a limit of MAGI phasing out at $104,000 and eliminated at $122,000 for married filing jointly. For single, head-of-household and qualifying widow(er), the credit starts phasing out at $52,000 and is eliminated at $62,000.
The credit amount is $2000 per tax return and is non-refundable. Qualifying expenses include tuition, required fees and expenses if paid directly to the institution as a condition of employment. The credit is for 20% of the qualifying expenses up to $10,000.
Both credits are unavailable if the taxpayer is married filing separately. They cannot claim the credit if they are claimed as a dependent on another’s return. Non-resident aliens are not eligible for the credit.
If you had education expenses in prior years and may have overlooked these credits or did not take full advantage of the credit, please call our office today to schedule a time to amend your returns.