This is a great time of year – kids are back in school and Fall is just around the corner.  However, I am sad that summer is over and traffic is terrible!  Some of you may have sent your kids off to college, and with that comes potential tax credits.  Please note that the income limits presented below are the 2014 limits and will most likely increase for 2015 tax returns.

American Opportunity Tax Credit

This credit is available to taxpayers with modified adjusted gross income below $180,000 for married filing jointly and $90,000 for single individuals.  The maximum credit allowed is $2,500 per student and is available for four post-secondary education years.  Also, 40% of this credit may be refundable, while the remainder would be non-refundable.  If a credit is non-refundable, that means that the refund can only reduce tax to $0 – i.e. it cannot generate a refund.  If a credit is refundable, then it can generate a refund.

Lifetime Learning Credit

The Lifetime Learning Credit is available to taxpayers with modified adjusted gross income below $128,000 for married filing jointly and $64,000 for single individuals.  The maximum credit is $2,000 per return and is available for all years of postsecondary education.  Also, this is a non-refundable credit.

Tuition and Fees Deduction

If you are not eligible for either of the education credits, then you may be eligible for the tuition and fees deduction.  Rather than receiving a credit to reduce tax owed, this reduces your taxable income.  The maximum deduction is $4,000 of qualified expenses.  The deduction is available to taxpayers with modified adjusted gross income below $160,000 for married filing jointly and $80,000 for single individuals.  This is a good option to have when you may not be eligible for the other 2 credits.

 

Both of the credits and the tuition and fees deduction require that the expenses are qualified.  Basically, this means that the expenses have to be for tuition, enrollment fees and course materials.  Some expenses that are not qualified would be room and board and meals.

You can always compare the 3 options to see which provides you the greatest tax savings.  If the credit provides you the greatest savings in one year, you do not have to do the same in the following year if another option gives you better tax savings.  In other words, you make the decision on which one to use every year.  If you choose to use a credit, then you cannot use the tuition and fees deduction in the same year.  If you have any questions regarding education credits or the tuition and fees deduction, always feel free to discuss with your tax advisor.