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Blog

Help for College Bills?

Charlie Caufield

November 1, 2016

Help for College Bills?

                Now would be a good time to see if you qualify for either of two college tax credits upon filing the 2016 federal income tax return.  In general, the American Opportunity Tax Credit, or Lifetime Learning Credit, is available to taxpayers who pay qualifying expenses for an eligible student.  Eligible students include the taxpayer, spouse, and dependents.  The American Opportunity Tax Credit provides a credit for each eligible student while the Lifetime Learning Credit provides a maximum credit per tax return. 

            Beginning in 2016 to be eligible for these credits, taxpayers must have received a Form 1098-T, Tuition Statement from the educational institution attended in 2016.  The information an educational institution is required to report on Form 1098-T is the amount paid for qualified tuition and related expenses for a single year.  In addition, to claim the American Opportunity Tax Credit for 2016 the taxpayer is now required to report the employer identification number of the educational institution receiving taxpayer’s qualifying payments, and the educational institution will be required to report only qualified tuition and related expenses actually paid on Form 1098-T rather than being allowed to choose between reporting amounts actually paid or amounts billed.

            Taxpayers may be confused as to why the amounts reported on Form 1098-T do not correspond to their payments.  There can be several reasons for this discrepancy.  For example, the amounts reported do not include charges such as insurance, room and board, and health fees because these amounts are not considered qualified tuition and related expenses.

            To claim these credits, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.  The American Opportunity Tax Credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000.  This means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.  The credit is only available for four tax years per eligible student and only if the student has not completed the first four years of postsecondary education before 2016.

            As is often the case, there is a phase-out.  The phase-out of the American Opportunity Tax Credit will mean that the credit is not fully available for taxpayers with modified adjusted gross income over $80,000 single filer and $160,000 joint filers, and disappears completely for single filers with $90,000 modified adjusted gross income and at $180,000 for joint filers.

            The Lifetime Learning Credit of up to $2,000 per tax return is available to both graduate and undergraduate students but the $2,000 limit applies to each tax return rather than to each student, and it is not refundable if no tax is owed.  Like the American Opportunities Tax Credit, the credit only applies to tuition and fees but not additional expenses.  Also, the credit of $2,000 is only fully available to the taxpayer who pays $10,000 or more in qualifying tuition and fees for all students on the return.  This credit also has a phase-out provision that allows the full credit to single filers with modified adjusted gross income of $55,000 or less and $111,000 for joint filers, and the credit disappears completely for single filers at a modified adjusted gross income of $65,000 and for joint filers of $131,000.

            These credits have very specific limiting rules, but because they can be very rewarding, we would recommend asking the help of your adviser if you think they may be applicable.  Any help to offset college costs should be pursued.

   

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