College Expenses Getting You Down? Tax Credits Can Help.


7209965342_74ec16941a-300x200Don’t let the blues set in each time you open your wallet to pay college expenses. Your check book may be feeling the bite now, but tax credits can help pay back next April.  Yes, I know, you just got through this year’s tax pain and all you want to do is enjoy your summer, but as Mary or John get ready to head out, you should think about the tax advantages that could help your wallet.

No one doubts that college is expensive, but the tax credits that the IRS offers are frequently overlooked. And qualifying for these tax credits can be complex. For example, there are limitations on income, and you are only allowed one type of tax credit per return, just to name a couple.

Firstly, Mary or John must be attending an accredited higher educational institution, which may be a college, university, or commercial certificate program.

# 1. American Opportunity Credit (AOC)

As expenses rack up, you can apply this tax credit to the first $4,000 of qualified expenses, which include tuition fees, required course materials (textbooks, lab fees, etc.). Computers could qualify, depending on whether they are required.

The way AOC works is that it credits 100% of the first $2,000, and 25% of the remaining $2,000. The maximum tax credit you can receive is $2,500, of which 40% is refundable. And you can claim this for every qualifying student in your household provided you have them as dependents on your tax return.

Here are the restrictions.

For Students:

  • Cannot have completed the first four years of higher education, starting at the beginning of the tax year.
  • Must be enrolled in a certificate program for at least half time.
  • Must not have a felony drug conviction.

For Taxpayers:

  • The credit can only be claimed four times. Presumably for each year of undergrad education.
  • Maximum income restrictions gradually impact the credit when:
    • Individuals filing single have income over $80,000, and eliminates the tax credit completely when income reaches $90,000
    • Couples filing jointly have income over $160,000, and eliminates the tax credit completely when incomes reaches $180,000

#2. Lifetime Learning Credit

medium_6355404323-300x199As an alternative to the AOC credit, this one covers up to 20% of a maximum $10,000 of qualified expenses. The maximum credit you can receive is $2,000.

Here are the restrictions.

For Taxpayers

  • Unlike the AOC credit, this one can only be applied once each tax return regardless of how many students are in the household.
  • The only way it can be claimed on the same return as the AOC credit, is to have each of these credits apply to different dependent students.
  • It’s a smaller credit than the AOC credit.
  • Income restrictions also apply here, and they are lower than the AOC restrictions.
    • Single tax payer income limit starts at $53,000, and eliminates the credit at $63,000
    • Joint tax payers income limit starts at $107,000 with a ceiling at $127,000
  • Eligible expenses are similar to the AOC, however, payment must be made directly to the institution.

Tuition and Fees Deduction

Unfortunately, these deductions terminated at the end of 2013. I’m mentioning them only to explain why I haven’t listed them here.

Don’t Overlook These Credits

While these tax credits may seem confusing, and will need to be worked out to determine which one will result in the greater benefit, don’t overlook what the IRS is offering as they could help you cut the cost of college.

Other Tax Credits You May Be Interested In

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photo 1 credit: Stefano Montagner via photopin cc

photo 2 credit: 401(K) 2013 via photopin cc

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.