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 2014, there are two tax credits available to help offset the costs of higher education by reducing the amount of your income tax. These tax credits are the American Opportunity Credit, and the Lifetime Learning Credit.
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*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 a tax credit, the American Opportunity Credit, to pay for college expenses.
The American Opportunity Credit was to expire at the end of 2012, but has been extended through December 2017, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.
You may be able to claim a Lifetime Learning Credit of up to $2,000 for eligible education expenses paid for qualified students enrolled in eligible educational institutions. There is no limit on the number of years the Lifetime Learning Credit can be claimed for each student. The Lifetime Learning Credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.
Generally, you can claim the Lifetime Learning Credit if all three of the following requirements are met:
- You pay qualified education expenses of higher education.
- You pay the education expenses for an eligible student.
- The eligible student is either yourself, your spouse or a dependent on your tax return.
If you are eligible to claim the Lifetime Learning Credit and are also eligible to claim the American Opportunity Credit for the same student in the same year, you can choose to claim either credit, but not both.
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 Credit for one student and the Lifetime Learning Credit for another student in the same year.
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You may be able to deduct qualified education 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). This deduction may be beneficial to you if you do not qualify for the Lifetime Learning Credit or the American Opportunity Credit.
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.
Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
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Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income 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 student loan interest deduction is claimed as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
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For more information please visit the Internal Revenue Service or National Association of Student Financial Aid Administrators (NASFAA)