Kansas City, MO,
12
August
2016
|
04:32 PM
America/Chicago

No More Ramen Noodles: Education Tax Credits

There is a reason why college students eat a lot of ramen noodles: while college may be the best four years of a person’s life, they’re usually not the richest years. Luckily, education tax credits can help students or their parents offset their education costs.

The American Opportunity Tax Credit (AOTC): This gem can be worth up to $2,500 per year for eligible students. Also, because 40 percent is refundable, eligible students or their parents can get up to $1,000 even if taxes aren’t owed. (Note: students usually don’t qualify to claim the refundable part of the credit on their own tax returns unless they support themselves with their own earned income and student loans.) This credit is only available for the first four years of higher education. The student must be enrolled in a degree or certificate program and taking at least a half-time course load.

The AOTC is a per-student credit, so parents with more than one eligible student may claim the credit for all of them.

Lifetime Learning Credit: For those who don’t qualify for the AOTC, this credit just might work. Worth up to $2,000, there isn’t a limit on the number of years students can claim this credit. That means eligible graduate students and students taking just a few courses can qualify for this credit.

Unlike the AOTC, only one Lifetime Learning Credit can be claimed on the tax return each year. If parents have more than one student with qualifying education expenses, they may claim the Lifetime Learning Credit and one or more AOTCs on the same tax return. With smart tax planning, taxpayers can save even more in taxes than what students can put away by living off ramen.

Now the question remains, what qualifies? First of all, only certain expenses can be used toward the credit. The two credits differ a bit in what qualifies, but basically tuition and fees that are required for enrollment count. Things like transportation, non-credit courses and hobbies do not count. So don’t try and pick up underwater basket weaving and expect a tax credit. For more information see the IRS page qualified expenses.

Another thing to look at is whether or not the school qualifies for the tax credit. Most do, including accredited vocational schools and junior colleges. Check to make sure through the U.S. Federal Student Aid Code List.

Besides tax credits, there are other back-to-school tax benefits to look into. Scholarships and grants are generally tax-free if used to pay for qualifying expenses. In addition, taxpayers paying back their student loans can deduct up to $2,500 in interest they pay.

Before heading back to school in the fall, students and parents should see if any of these tax credits or deductions can benefit them. School is hard enough without worrying about money.

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