Federal tax credits and deductions are the newest forms of federal aid. A tax credit is money which can be subtracted from the amount of taxes you owe. In order to receive a tax credit, you must complete a federal tax return, meet certain federal guidelines, and pay taxes. Tax credits are subtracted directly from the tax a family owes. Tax deductions differ from tax credits in that deductions are subtracted from your taxable income.
For tax year 2015, there are two tax credits available to help offset the costs of higher education by reducing the amount of your income tax: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
*A taxpayer can only claim one of these credits for the same student in the same year.
Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for the American Opportunity Tax Credit (AOTC) to help pay for college expenses. The AOTC was set to expire but has been extended through December 2017 - making the benefit available to a broader range of taxpayers. The credit can now be claimed for four post-secondary education years instead of two. The list of qualifying expenses has also been expanded to include required course materials.
The maximum annual credit of $2,500 (per student) is available to individuals whose Modified Adjusted Gross Income (MAGI) is $80,000 or less. The full credit is available to married couples filing a joint return whose Modified Adjusted Gross Income is $160,000 or less.
For answers to commonly asked questions regarding the AOTC, visit their website.
The Lifetime Learning Credit (LLC) of up to $2,000 is an option for qualified students who are enrolled in eligible academic institutions and who pay for eligible educational expenses. (The eligible student must either be yourself, your spouse, or a dependent on your tax return). There is no limit on the number of years the LLC can be claimed for each student and may be particularly helpful to graduate students, students who are only taking one course, and students who are not in a degree-seeking program.
If you pay qualified education expenses for more than one student in the same year, you can choose to claim credits on a per-student, per-year basis. This means that, for example, you can claim the American Opportunity Tax Credit for one student and the Lifetime Learning Credit for another student in the same year.
The tuition and fees deduction may be beneficial to you if you do not qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit. You may be eligible to deduct qualified educational expenses paid during the year for yourself, your spouse, or a dependent, as a tuition and fees deduction. This deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction is claimed as an adjustment to income which means you may claim it even if you do not itemize deductions on Schedule A (Form 1040).
You cannot claim the tuition and fees deduction if any of the following apply:
- Your filing status is married filing separately.
- Another person can claim you as a dependent on their tax return.
- Your Modified Adjusted Gross Income (MAGI) exceeds certain limits.
Please note that student-activity fees and expenses for course-related books, supplies and equipment are included in qualified educational expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, you may qualify for the student loan interest deduction if your Modified Adjusted Gross Income (MAGI) is less than $80,000 ($160,000 if married filing a joint return) and you have paid interest on a student loan used for higher education within the tax year. The deduction includes both required and voluntary interest payments.
For most taxpayers, MAGI is the Adjusted Gross Income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500. The deduction is claimed as an adjustment to income which means you may claim it even if you do not itemize deductions on Schedule A (Form 1040).
For general information, visit the Internal Revenue Service or National Association of Student Financial Aid Administrators (NASFAA).