Tax Credits


A tax credit is an amount you can subtract from the tax you would otherwise owe. Unlike a deduction or exemption, a credit is a dollar-for-dollar reduction of your tax bill. For example, if you pay someone to care for your young children or for elderly or disabled relatives, you may be able to subtract that money, up to a set limit. Some credits are available for money you spend on higher education expenses. If you are a taxpayer, you may qualify to take these credits or you may take them for your spouse. If you are listed as a dependent on someone else's tax return, that person or couple — often your parents — may be able to claim these credits.

If you qualify, a tax credit generally is more beneficial than a deduction. A credit directly reduces the tax that you owe. A deduction reduces the amount of your income that is taxable.

The college, university, or other postsecondary school should provide a Form 1098-T that reports what you paid for qualified expenses for the year. To claim the credit you file IRS Form 8863 with your tax return.

Each qualifying student is entitled to use one of the following federal credits for each tax year, but no student can use more than one of them. In addition, you can't claim the credit for expenses that you paid for with tax-free withdrawals from a 529 College Savings Plan or a Coverdell ESA or for expenses for which you take a tax deduction.

Some states also offer tax credits for qualified education expenses. Check with your financial aid office or the state's Department of Education.

AMERICAN OPPORTUNITY TAX CREDIT (AOC)

  • This credit, which is an expanded version of the Hope Scholarship Tax Credit, is available through December, 2017.

  • The AOC covers up to $2,500 of qualified education expenses paid for each eligible student enrolled in the first four years of postsecondary education.

  • The student must be pursuing an undergraduate degree or other recognized education credential and be enrolled at least half-time for at least one academic session — quarter, trimester, or semester — during the tax year.

  • Tuition and fees required for enrollment are eligible expenses, as are course-related books, supplies, and equipment, even if you did not purchase them from the school.

  • Generally, 40% of the AOC is refundable, which means you may receive up to $1,000 even if you owe no taxes.

  • Eligibility for this credit is limited by your modified adjusted gross income (MAGI). Currently, you may take the full credit if you are single and your AGI is $80,000 or less, and partial credit until your AGI reaches $90,000. If it's more than $90,000, you aren't eligible for the credit. The comparable amounts if you are married and file a joint return are $160,000 and $180,000.

  • The credit is available for every eligible student.

For updated information visit the IRS website.



LIFETIME LEARNING TAX CREDITS

  • You may claim up to a $2,000 tax credit for qualified education expenses, or 20% of what you pay, up to $10,000. Eligible students must be enrolled in at least one postsecondary course (undergraduate or graduate) or in courses to acquire or improve job skills.

  • The program doesn't have to be a degree program, and students can be in any year of study.

  • Tuition and related fees are qualified expenses, but room, board, books, supplies, and other living expenses are not.

  • Eligibility for this credit is limited by your modified adjusted gross income (MAGI). Currently, you may take the full credit if you are single and your AGI is $52,000 or less, and partial credit until your AGI reaches $62,000. If it's more than $60,000, you aren't eligible for the credit. The comparable amounts if you are married and file a joint return are $104,000 and $124,000.

  • None of this credit is refundable.

  • This credit is available on the basis of one credit per tax return, regardless of how many qualified dependent students may be enrolled.



For updated information visit the IRS website.
For more information, see IRS Publication 970, "Tax Benefits for Education," which you can read or download at www.irs.gov
 
Tax credits save you more money because they are subtracted directly from the tax you owe. It’s smart to find out which ones you qualify for and take advantage of them. Some are for education expenses, but others cover childcare and other expenses you may have.