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What you need to know about Education Credits

What you need to know about Education Credits

You, your dependent, or a third party pays for your qualified education expenses for your higher education. You must be an enrolled at an eligible educational institution. And in closing, the qualifying student must be yourself, your spouse, or a dependent listed on your tax return. 

There are two education credits that you might qualify for. The credits include American Opportunity Tax Credit and the Lifetime Learning Credit.  However, you may only take one tax credit per year, not both.

The American Opportunity Tax Credit is for those individuals who are in the first four years of higher education. The student must pursue a recognizable degree and be enrolled for at least half the time at their academic institution at the beginning of current tax year. However, if you already claimed this credit or the Hope Credit for more than four years you will be in ineligible. Also, if you were convicted of a felony drug charge you will not qualify. Therefore, if you meet all of these guidelines than you will be eligible for $2,500 tax credit.

To be qualified for the Lifetime Learning Credit, you must be enrolled at an eligible educational institution. You must be taking higher education to get a degree or improve the traits in your current job skill and you must be enrolled for one academic year in that specific tax year.  

To claim the full credit

·   Your Modified Adjustment Gross Income (MAGI) modified adjusted gross income must be $55,000 or less or $110,000 or less if you are married and filing jointly.

·     If your MAGI is over $55,000 but less than $65,000 (over $110,000 but less than $130,000 for married filing jointly), you receive a reduced amount of the credit.

·    If your MAGI is over $65,000 ($130,000 for joint filers), you cannot claim the credit.

If you are a college student each year you will receive what is called a Form 1098-T which is a tuition statement from your school.  If the total tuition that you paid exceeds $2,000 and meet all of the requirements as explained above, you will be eligible for a $2,000 credit. You will then proceed to fill out Form 8863 which you will then attach to your 1040.

Part of my job as a tax professional is to advise my clients on what tax credits that they might be eligible for.  These two education credits are extremely attractive to the taxpayer because they are dollar for dollar credits which reduce your overall tax liability.  I just had a case of a new client who finished undergraduate school without taking the AOC credit. We went back and amended the 2015 tax return so that we could take advantage of the $2,500 tax savings.  The Lifetime Learning credit was built for graduate students.  Universities are charging a fortune for tuition so it is extremely important that you as the taxpayer are aware of these opportunities.  Contact me today so that you don’t miss out!

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