As college tuition costs keep rising, it is becoming harder for parents to afford tuition for their children. However, two common tax deductions are available to help alleviate the cost of college: the American Opportunity Credit and the Lifetime Learning Credit. Using these educational tax credits can help decrease tuition costs by up to $2,500 per year per dependent child.
American Opportunity Credit
The American Opportunity Credit, which was enacted in 2009 and is currently valid until 2017, provides up to $2,500 in tax credits per dependent child per year. This credit is only valid for undergraduate costs and provides a 100 percent credit on the first $2,000 of costs and a 25 percent credit on the next $2,000 of costs, for a maximum of $2,500. The following rules apply to the American Opportunity Credit:
This credit can be claimed for multiple dependent children in the same year. For example, someone with four dependent children can receive $10,000 of tax credits, if all other requirements are met.
The credit cannot be claimed for a student who already has at least four years' worth of college credits at the beginning of the year. Additionally, the credit can only be claimed for a year in which the student has a minimum of a half-time course load for at least one semester starting in that year.
The student must be enrolled in a program to obtain an Associate or a Bachelor's Degree and must attend an eligible institution. Most schools in the United States are considered to be eligible.
Eligible expenses include tuition, mandatory enrollment fees, textbooks and other course materials. However, room and board and certain other optional expenses are not eligible for this credit.
In addition to the above, certain income and tax filing restrictions apply to the American Opportunity Credit:
- The Income Phase-out Rule: This credit is phased out for those whose modified adjusted gross income exceeds certain thresholds. In 2013, the phase-out range was from $80,000 to $90,000 for single individuals and between $160,000 and $180,000 for married couples filing jointly.
- Couples who are married but filing separately are not eligible for the American Opportunity Credit.
The credit is refundable up to 40 percent. In other words, up to 40 percent of the credit can be received as a tax refund even if the individual did not owe any federal taxes. For someone whose total credit is $2,500, $1,000 (40 percent) is considered refundable while the remaining $1,500 can only be claimed if federal income taxes are owed.
Lifetime Earning Credit
The Lifetime Earning Credit provides a tax benefit of up to $2,000 to cover tuition costs. The credit is 20 percent of up to $10,000 of qualified expenses. Unlike the American Opportunity Credit, it covers costs both undergraduate and graduate programs. Additionally, it provides other benefits that the American Credit Opportunity does not: students who are carrying a limited course workload or already have four years of college credit are eligible. The Lifetime Learning Credit is also subject to the following restrictions:
The total maximum amount of covered expenses is $10,000 per year and the maximum credit is $2,000 per year, regardless of the number of dependent children that someone has.
It is not possible to claim the American Opportunity Credit and the Lifetime Learning Credit for the same student during the same year.
The Lifetime Learning Credit is also subject to the Income Phase-out Rule, but at lower thresholds: between $50,000 and $60,000 or single individuals and between $100,000 and $120,000 for married couples filing jointly.
Like the American Opportunity Credit, this credit also cannot be claimed by married couples filing separately.
While tuition is not cheap and the prices keep increasing, the American Opportunity Credit and the Lifetime Learning Credit are available to help ease this burden. The correct use of either or these two educational tax credits can help parents defray these expenses for their dependent children.