Education tax credits are one of the widest-reaching programs to help individuals and families pay for college. You don’t have to demonstrate extreme financial need or a minimum GPA. You can use the money even when you’re just taking a course or two to update skills. Plus, if you forgot to claim a credit you’re qualified to receive, you can amend your tax returns for up to three years.
Here’s what you need to know about claiming federal education tax credits for the past, present and future.
What are the basics of the two main education tax credits?
The American Opportunity Credit allows you to get up to $2,500 back per year when filing your taxes on the first four years of tuition and other qualified education expenses, while pursuing a degree with at least half-time status:
- The first $2,000 is given back to you dollar-for-dollar. So, if you paid $2,000 in tuition, you’d get $2,000 back if you paid at least $2,000 in taxes.
- The first 40% is refundable, even if you paid zero in taxes. For example if you paid $0 in taxes and declared the tax credit, you’d still get a refund of $1,000.
- The next thousand is refundable based on the amount you paid. Thus, if you paid $1,806 in taxes you’d get $1,806 back if you had at least that much in tuition and qualified expenses.
- Once you hit the $2,001 mark in taxes spent, you’d get back 25% of the next $2,000 spent.
The Lifetime Learning Credit can be used for limitless years once you’ve used up the American Opportunity Credit:
- You only get 20% of your tuition back, but it’s forever as long as you meet income requirements in the years you’re claiming the tax credit.
- You also don’t have to pursue a degree or be at least a half-time student.
- To get the full $2,000 yearly maximum of this tax credit, you have to have spent at least $10,000 in qualified education expenses such as tuition, fees and textbooks.
- You still get a percentage back if you spent less. If you claimed $2,000, you’d add $400 to a tax refund or reduce your tax bill by $400.
The modified adjusted gross income (MAGI) is used to determine which deductions and credits you qualify for.
The MAGI you’d need to claim the full amount of the American Opportunity Credit is $80,000 as an individual or $160,000 as a married person filing jointly. If claiming between $80,000 and $90,000 for individuals and $160,000 and $180,000 for married couples, you’d get a partial credit based on where you fall in the range. For instance, if you’re exactly in the middle of the range, which for an individual is $85,000, you’d qualify for up to a $1,250 credit.
The Lifetime Learning Credit MAGI number is $55,000 for individuals and $110,000 for married individuals filing jointly for the full credit. The range for partial credit is $55,000 to $65,000 for individuals and $111,000 to $131,000 for married taxpayers filing jointly. Where you are in the range also determines what percentage of the credit you receive.
Did you take any courses from a higher education institution in the last three years?
If you took courses in the past three years and didn’t claim a federal tax credit you qualify for, you can still claim your credit. One common reason this might happen is if you didn’t file your return because you were a student who didn’t earn enough to pay taxes.
If this is your case, you don’t even have to file an amended return. You just file a return for the years you didn’t file and you can get $1,000 back for each year that you could have claimed the American Opportunity Credit if you had $0 tax liability. You may also get back money from your state.
Are you in school this year?
If you’re in your first four years of college and qualify for the American Opportunity Credit or Lifetime Learning Credit, you can still claim it in 2017. You’ll claim the 2017 tax credit on your 2017 federal tax return.
Keep an eye out later in this year to see if education tax credits continue. In the meantime, enjoy these credits and don’t forget state tax credits and deductions. Be aware when filling out your FAFSA that your state may offer additional scholarships.
Paying for college requires strategies during college, immediately after and for continuing education to keep your skills up to date. As always, working with a financial advisor and tax professional can help you address any questions you have with your specific situation.
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