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Can You Claim Education Tax Credits?

The costs of higher education continue to rise with no end in sight. Over the past 17 years, the college inflation rate has been about 7.4%, according to The College Board. This is more than double the broad U.S. inflation rate of 2.3% as measured by the Consumer Price Index For Urban Consumers during the same time period.

There is a silver lining, however, if you’re a parent who’s struggling to pay college costs for your child. Two education tax credits are available that could help lessen the sting of paying for college. Generally speaking, tax credits are more valuable than tax deductions as they can lower your tax bill on a dollar-for-dollar basis.

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What Are the Main Education Tax Credits?

The federal government offers the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) to families and students that qualify. One of the qualification criteria to determine the amount of the credit is based on how much you or your family earns — or more specifically, your modified adjusted gross income (MAGI).

So how do you qualify for the education tax credits? In order to claim the full amount of the AOTC, your MAGI must not exceed $80,000 if you’re single or $160,000 if you’re married and file jointly in 2019. You can claim a partial AOTC if your MAGI is between $80,000 and $90,000 if you’re single or between $160,000 and $180,000 if you’re married and file jointly. If your income is over $90,000 as a single taxpayer or ($180,000 for married taxpayers filing joint), you can’t claim the credit.

In order to claim the full amount of the Lifetime Learning Credit, your MAGI must not exceed $58,000 if you’re single or $116,000 if you’re married and file jointly in 2019. You can claim a partial LLC if your MAGI is between $58,000 and $68,000 if you’re single or between $116,000 and $136,000 if you’re married and file jointly.

Are There Other Qualification Criteria?

In addition to the MAGI limits, there are other qualification criteria for both the American Opportunity Tax Credit and the Lifetime Learning Credit.

To qualify for the AOTC, the student must be enrolled at least half-time in a program leading toward a degree, certificate or other recognized educational credential for at least one academic period during the year. The AOTC can only be claimed during the first four years of college — it can’t be claimed for education expenses incurred for graduate studies. Also, if your student has committed a federal or state felony drug offense at the end of the tax year, he or she isn’t eligible for the AOTC.

The qualification criteria for the LLC are similar with two exceptions: First, there is no limit on the number of years you can claim the credit. Additionally, you can claim this credit for graduate studies, under-graduate studies as well as professional degree courses which may include courses to acquire or improve job skills. However, you can’t claim both tax credits for the same student. If you qualify for both, determine which credit offers the most financial benefits for your family.

How Much Are the Education Tax Credits Worth?

The AOTC is worth up to $2,500 per year spent on qualified education expenses. More specifically, the credit is equal to 100 percent of the first $2,000 spent on qualified education expenses and 25 percent of qualified expenses that exceed $2,000. Also, the AOTC is a partially refundable tax credit, which means you can still get a credit even if you don’t owe any federal income taxes. In this case, you can receive a tax refund of up to $1,000.

The LLC is worth up to $2,000 per year spent on qualified education expenses. More specifically, the credit is equal to 20 percent of the first $10,000 spent on qualified expenses. So if you had $10,000 in qualified education expenses and you are eligible for the full tax credit, your credit amount would be $2,000. Unlike the AOTC, the LLC is not refundable — if you owe zero dollars in federal taxes, you won’t get a tax refund.

Valuable Cost-Saving Opportunities

The American Opportunity Tax Credit and the Lifetime Learning Credit represent two valuable opportunities to lower the cost of sending your children to college. Visit the IRS website to learn more about these education tax credits.

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brian Wainscoat, CPA
As a tax specialist at Personal Capital, Brian brings a depth of tax knowledge that can be coordinated with clients’ tax planning strategies. Brian has an extensive background in tax preparation with high-net worth individuals, as well as business owners and specializes in optimizing tax efficiency for individual client situations. Brian is a Certified Public Accountant licensed in Colorado. He received his BA in Business Administration with an emphasis in accounting from Washington State University. In his free time, he enjoys spending time with his family and friends, bicycling, skiing, and volunteering and giving back to the community.
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