Education Credit

Author: J&R Accounting Group LLC. |

Blog by J&R Accounting Group LLC

What is American Opportunity Tax Credit (AOTC)

American Opportunity Credit (AOTC) is tax credit that can be claimed on things like the tax return of a student, a person claiming the student as a dependent, or a spouse making post-secondary education payments. The tax credit is for the first four years of a student’s post-secondary education and must qualify for education expenses. It replaced the Hope Credit.

Who qualifies for AOTC?

Students who are pursuing either a degree or other recognized education credential. At the beginning of the tax year, they must be enrolled for at least half time for at least one academic period. They are not allowed to have finished the first four years of higher education at the beginning of the tax year. They cannot have claimed the AOTC or the former Hope credit for more than four tax years. The student also cannot have a drug conviction felony at the end of the tax year.

What are the income limitations?

To be able to claim the credit in full, your modified adjusted gross income (MAGI) must be $80,000 or less. For people who are married filing jointly it would be $160,000. If your MAGI is above $80,000 but less than $90,000, you will receive a reduced amount of credit. For people who are married filing jointly if it is above $160,000 but less than $180,000, you will receive also receive a reduced amount of credit. If your MAGI is above $90,000 you cannot claim the credit. For people who are married filing jointly you cannot claim the credit if your MAGI is above $180,000.

How do you calculate AOTC?

Students get a tax credit based on 100% of the first $2,000 plus 25% of the next $2,000. 25% of $2,000 is $500, so the most you will be able to receive is $2,500 per student per year. If you are paying $4,000 or more in education expenses per year will be able to get the full $2,500. If you are paying less than $4,000 for education expenses your credit will be less. For example, say you pay $3,000 for education expense. You would claim 100% of the first $2,000. Then you claim 25% of what is left. 25% of $1,000 is $250. If you add them together you will receive $2,250 for the tax credit. Things that need to be removed from the total amount of education expenses before calculating the credit consist of tax-free portion of education scholarships, fellowships, employer-provided education assistance, veterans educational assistance or any other tax-free educational assistance.

 

Lifetime learning credit

The Lifetime Learning Credit (LLC) helps lower tax liability to help offset higher education expenses. It is not refundable. You can use the credit to pay any taxes you owe but you will not get any of the credit back as a refund. The credit has no limit and can be claimed year after year. In the same tax year, it cannot be combined with the American Opportunity Tax Credit (AOTC).

Who qualifies for LLC?

To qualify for LLC, you must be enrolled or taking courses at an eligible education institution. You must be taking at least one higher education course to get a degree or other recognized educational credential or to improve job skills. You must also be enrolled for at least one academic period that begins in the tax year. An academic period consists of semesters, trimesters, quarters, or any other period of study that is determined by the school. If the school does not have academic terms, the payment period can be used as an academic period.

What are the income limitations?

You can get full credit if your MAGI is below $57,000. If you are married filing jointly you can get full credit if your MAGI is below $114,000.  You can get a reduced amount if your MAGI is between $57,000 and $67,000. If you are married filing jointly you can get a reduced amount if your MAGI is between $114,00 and $134,000. You cannot qualify for the credit if your MAGI is above $67,000. If you are married filing jointly you cannot qualify for the credit if your MAGI is above $134,000.



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