Many people do not realize that education credits are not only available for your child’s tuition. Instead, they are also available for you, your spouse, or your dependents. Even if you attend school part-time, these credits may still be available.
There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary post-secondary institution that can participate in the U.S. Department of Education’s student aid programs.
The credits phase out for higher-income taxpayers who are married filing jointly (MFJ) or who are unmarried. Those who are married filing separately (MFS) do not qualify for either credit.
The following table provides the qualifications for both credits:
QUALIFICATIONS AOTC LLC Allowance Period First 4 years of post-secondary education Any post-secondary education for any number of years Enrollment Must be considered at least a half-time student by the educational institution Not required to be enrolled at least half-time Program Type Must be pursuing a program leading to a degree or another recognized educational credential Not required to be enrolled for the purpose of obtaining a degree or other credential Credit Applied Per student Per family Credit Amount 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses 20% of up to $10,000 in qualified expenses Qualified Expenses Qualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendance Qualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution High Income Phase-out Based upon filing status and adjusted gross income (inflation-adjusted annually; 2017 amounts shown) MFJ: $160,000 to $180,000MFS: No credit allowedUnmarried: $80,000 to $90,000 MFJ: $112,000 to $132,00MFS: No credit allowedUnmarried: $56,000 to $66,000 Refundable* Partially; 40% of the credit is treated as refundable No
*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.
Many individuals who both work and attend school can be enrolled less than halftime and still qualify for the LLC.
Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses. Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education; the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.
Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent); this includes the information necessary to complete the IRS form and claim the credit. Unless the IRS has exempted the educational institution from having to file a 1098-T, the law requires the taxpayer to have this 1098-T in hand to claim either of the credits.
If you have questions about how this these education tax credit provisions apply to you, please give Dagley & Co. a call.
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When it comes to saving for your children’s education, the tax code provides two primary advantages. We frequently get questions about the differences between the programs and about which program is best suited for a family’s particular needs.
The Coverdell Education Savings Account and the Qualified Tuition Plan (frequently referred to as a Sec 529 Plan) are similar; neither provides tax-deductible contributions, but both plans’ earnings are tax-free if used for allowable expenses, such as tuition. Therefore, with either plan, the greatest benefit is derived by making contributions to the plan as soon as possible—even the day after a child is born—so as to accumulate years of investment earnings and maximize the benefits. However, that is where the similarities end, and each plan has a different set of rules.
Coverdell Savings Accounts only allow a total annual maximum contribution of $2,000. The contributions can be made by anyone, including the beneficiary, so long as the contributor’s adjusted gross income is not high enough to phase out the allowable contribution. (The phase-out threshold is $190,000 for married contributors filing jointly and $95,000 for others.) Unless the beneficiary of the account is a special needs student, the funds must be withdrawn prior to age 30. The funds can be used for kindergarten through post-secondary education. Allowable expenses generally include tuition; room, board, and travel expenses required to attend school; books; and other supplies. Tutoring for special needs students is also allowed. Funds can be rolled over from one beneficiary to another in the same family. Although the funds can be used starting in kindergarten, the chances are that not enough of earnings will have been accumulated by that time to provide any significant benefit.
On the other hand, state-run Sec 529 plan benefits are limited to postsecondary education, but they allow significantly larger amounts to be contributed; multiple people can each contribute up to the gift tax limit each year. This limit is $14,000 for 2015, and it is periodically adjusted for inflation. A special rule allows contributors to make up to five years of contribution in advance (for a total of $70,000 in 2015).
Sec. 529 Plans allow taxpayers to put away larger amounts of money, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.
Which plan (or combination of plans) is best for your family depends on a number of issues, including education goals, the number and ages of your children, the finances of your family and of any grandparents or other relatives willing to help, and a number of other issues. For assistance in establishing education savings plans, please get in touch with us at Dagley & Co.
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