Many families are finding it more and more difficult to send their children to college due to the ever-increasing cost of post-secondary education. As many recent graduates and their families prepare for the transition from high school to college in the coming months, they should take note of potential tax relief available to help offset a portion of the associated cost. The current tax code allows deductions for tuition and fees as well as the long-standing student loan interest deduction. While those deductions can be helpful in the right circumstances, the two best options available for reducing tax liability are the American Opportunity Tax Credit and the Lifetime Learning Credit.
The American Opportunity Tax Credit is a refundable tax credit available for each of the first four years (generally the duration of the undergraduate curriculum) of a student’s post-secondary education. The maximum credit amount is $2,500 per eligible student per year for qualified tuition and related expenses, which include tuition, fees, and course materials. The American Opportunity Tax Credit is phased out at modified adjusted gross income between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers); and, for each eligible student, the credit can only be claimed for four tax years. Additionally, the student must be enrolled in a degree or certificate program at least half-time in order to qualify. This credit is currently available through 2017; after that time, it is scheduled to expire, barring any additional legislative action.
The Lifetime Learning Credit is available for any post-secondary tuition, including graduate school or undergraduate education beyond four years, and does not require a minimum enrollment, as is the case with the American Opportunity Tax Credit. Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is a per-taxpayer (per-return) credit, rather than a per-student. This tax provision allows for a maximum $2,000 tax credit per return and is nonrefundable. Additionally, the Lifetime Learning Credit phases out at a much lower modified adjusted gross income level. That phase out is currently between $55,000 and $65,000 (between $110,000 and $130,000 for joint filers).
When compared side-by-side, the American Opportunity Tax Credit is generally preferred over the Lifetime Learning Credit for post-secondary education expenses since it will yield a greater monetary benefit. However, due to the various requirements and subtle differences summarized above, taxpayers should consider both and utilize the most beneficial option when filing.
If you have questions regarding the American Opportunity Tax Credit, the Lifetime Learning Credit, or other possible alternatives for defraying the cost of higher education, contact the expert listed below at PYA, (800) 270-9629.
