Imagine receiving a tax break from the IRS instead of sending them money. You could enjoy this reality with the American Opportunity tax credit and grant yourself $2500. This tax credit is used to reduce that amount from your taxes and is akin to putting money in your pocket.
There are up to $2500 in Hope credits available if you are in a certificate or an undergraduate degree program. Note that professional programs and graduate programs are excluded from this tax credit.
The Hope Tax Credit & American Opportunity Tax Credit
To determine how much of a Hope tax credit you can claim, check the total amount of money that you paid out of pocket for your tuition. You can utilize the American Opportunity tax credit for tuition only. It is not usable for additional expenses such as room and board.
After you have calculated the amount, you personally paid for tuition, you can claim 100% of the first 2K and 25% of the next 2K that you paid. Therefore, you must have paid a minimum of 4K in education expenses that qualify to claim the full $2500.
Special Forms & Non-Felony Requirements
Use Form 1040 or 1040A to claim the American Opportunity tax credit. You will also need to attach the Education Credits Form 8863. Take note of the extra stipulations attached to the credit including that you must be enrolled in a program that ends in a degree and enrolled at least half-time.
You may also be enrolled in a recognized educational credential program or certificate program. You need to be free from distributing or possessing a controlled substance and any related felony charges.
Other income requirements need to be met for eligibility. A single taxpayer can get full credit if the adjusted modified gross income is not over 80K. If it does exceed this amount but is less than 90K you have the option of claiming a partial credit.
If you are a married couple that is filing jointly, you are eligible full credit if your combined income is not more than 160K. If you earn more but come in less than 180K, you are eligible to claim a partial credit.
The Lifetime Learning Credit
The other tax credit you may receive is up to $2,000 with the Lifetime Learning credit. The Lifetime Learning credit is similar to the American Opportunity tax credit and reduces the tax you owe dollar for dollar. But unlike the American Opportunity, the Lifetime Learning credit may also be used for graduate school or even continuing education.
However, you cannot claim both an American Opportunity and a Lifetime Learning credit in the same year. It is usually to your advantage to claim the American Opportunity tax credit for undergraduate expenses. If you are taking continuing education courses or are a graduate school student, then you have no choice but to take the Lifetime Learning credit.
The Lifetime Learning credit has a maximum amount of 2K per tax return. This amount is from taking twenty percent of what you pay for tuition, not other expenses including room and board, up to 10K.
To claim the total 2K credit, you must spend 10K or more out of your pocket on tuition fees alone. Scholarships and money that are receiving a tax benefit already are tax-free. The 529 Savings Plan does not count when you are figuring out how much you have spent since the IRS does not condone double rewards.
Eligible courses may be taken to improve or acquire job skills or be a component of a postsecondary degree program. Eligible institutions include any educational vocational school, university, postsecondary educational institution, or college.
The school must be eligible to participate in a Department of Education offered student aid program. This umbrella encompasses practically all proprietary, non-profit, public and private postsecondary institutions including profit-making and privately owned options.
Note that the felony drug conviction rule that can prevent people from receiving an American Opportunity tax credit actually doesn't apply to the Lifetime Learning credit.
Income Requirements for the Lifetime Learning Credit
To be eligible for this award, you need to meet the income requirements. If a single taxpayer's modified adjusted gross income doesn't exceed 48K, you can receive the complete credit.
If your income does exceed that amount but comes in under 58K you may claim a partial credit. Married couples filing jointly may receive the complete credit if their combined income is not more than 96K. If your combined income is higher but less than 116K, you are eligible to claim a partial credit.
It is essential to know that you are only allowed to claim one of the credits each year. Be sure to take advantage of the best one. If you are lucky enough to qualify for both, you may prefer to choose the American Opportunity tax credit as it allows you to qualify for the full benefit amount while utilizing less of your own cash.
Student Loan Interest
The student loan interest that you pay has a tax deduction of up to $2500 per year. The loan needs to have been utilized for qualified higher education expenses including fees, tuition, supplies, room and board and additional related costs.
The maximum allowable deduction is reduced gradually for individual taxpayers who have a modified adjusted gross income over 55K but come in under 70K. Married taxpayers who are filing together must have their modified adjusted gross income of more than 115K but less than 145K to be eligible.
Form 1098-E for Claiming Interest
Generally, you can count the loan-origination fees as interest, other than service fees, interest on revolving lines of credit, capitalized interest and the interest generated on refinanced student loans. This includes both collapsed loans and consolidated loans. You may additionally count any voluntary interest payments that you make. You will need the form 1098-E from your loan servicer or your lender to claim the deduction.
Additional Tax Deductions
Understand that tax deductions are not as beneficial as tax credits. However, they do still reduce your taxable income, and this allows you to pay fewer taxes. One of the most popular education deductions is for money that you pay for fees and tuition. This may be the tuition you paid for a dependent child, a spouse, or yourself. You are allowed to deduct up to 4K of tuition expenses only. This does not include additional expenses or room and board.
The eligibility is for the money you paid yourself if you are not additionally claiming a Lifetime Learning credit or an American Opportunity credit. There is no double-dipping allowed so ensure that your calculations are accurate. You are not able to deduct any tuition costs that you paid for with tax-free cash from scholarships etc.
Educational Assistance Benefits
Some people may be able to receive up to $5250 of tax-free employer-provided educational assistance benefits per year. This is only an option if you have a generous employer. You might not be required to pay tax on the amounts your employer pays for your education including payments for fees tuition, equipment, supplies, books and related expenses.
This is offered for both graduate-level and undergraduate courses. Payments don't have to be for work-related classes. A benefit is that the payments don't have to be strictly for work-related classes.
Note, that you are not able to use any tax-free education expenses provided by your boss as the base for any additional credits or deductions, including the Lifelong Learning and American Opportunity credits. Speak with your employer to find out if this is an option.
Meeting Income Requirements Before Claiming Your Deduction
Again, you are required to meet the income requirements to claim the full deduction. A single taxpayer with a modified adjusted gross income of 65K or less is the standard for individuals. Couples who are filing jointly must have an adjusted gross income of 130K or less to be eligible for the complete deduction. If you make more on your own as a single taxpayer but less than 80K or have a combined income of less than 160K jointly, you can deduct only 2K in tuition costs.