Here is a letter from a reader in New York:
"There appear to be three ways to file and get credit for educational expenses: The American Opportunity Credit, lifetime learning credit and the standard tuition and fee deductions. What are the pros and cons and requirements of each?"
Education tax breaks are important to understand, but they are hardly simple or straightforward. A lot depends on your personal situation.
Here are a few guidelines:
First, there are income caps. You cannot claim a lifetime learning credit (LLC) if you earn $65,000 or more (single filers), or $130,000 or more (joint return). When I'm using the term "earn," I'm talking about "modified adjusted gross income," or MAGI. Your MAGI is your gross income plus any tax-exempt interest income. You'll find that figure on your Individual Tax Return Form 1040 (line 38) (or line 22 of Form 1040A).
The American Opportunity Tax Credit (AOC) has a slightly higher income cap: $90,000 for single filers or $180,000 for joint filers.
Thus, if your earnings qualify you for the LLC, you also qualify for the AOC, but you cannot use both credits for the same student (nor can you take the tuition and fees deduction for the same student). The AOC credit can be as high as $2,500, and the LLC up to $2,000. The AOC is a refundable credit; the LLC is not. (If you don't normally file a tax return and you qualify for a refundable credit, you'll get a check in the mail from the U.S. Treasury.) You can claim both credits on the same tax return, but not for the same student.
Second, the expenses you want to claim for the credit have to be "qualified education expenses," which are generally tuition and fees "required for the student's enrollment or attendance at an eligible educational institution," according to the IRS. The IRS definition of eligible educational institution is: "generally any accredited public, nonprofit, or proprietary (private) college, university, vocational school, or other postsecondary institution."
The LLC applies to postsecondary education or courses to improve job skills. The AOC is limited to four years of postsecondary education.
Third, the student also must qualify.
The AOC is more restrictive than the LLC. A student cannot take advantage of the AOC if:
1. The student had completed the first four years of postsecondary education as of the beginning of 2015, or
2. The student claimed either the AOC or the "Hope scholarship credit" (an extension of the AOC) for any four tax years before 2015, or
3. The student enrolled for less than half-time or for less than one academic period at the educational institution, or
4. The student was convicted of a federal or state felony for possessing or distributing a controlled substance.
None of these limitations applies for the LLC.
The best way to get an answer on which credit applies to your situation is to go through IRS Form 8863 ("Education Credits," http://tinyurl.com/jzpa2hz), which you would attach to your tax return to claim a credit. You'll also want to study the instructions to the form (http://tinyurl.com/z377vfs).
Form 8863 starts you off with the following caution: "Complete a separate Part III on page 2 for each student for whom you are claiming a credit." You'll come back to Part I only after completing Part III for each student.
In Part III, you'll enter information about the student, who can be you the taxpayer, your spouse or a dependent, and the qualified educational institution.
By answering the questions in Part III, you will find out whether the student qualifies for the LLC or the AOC.
Then you will return to Part I, which is all about you, the taxpayer. By filling out this section, you'll discover whether you qualify for a refundable AOC. If you don't qualify, you'll go through Part III, which will determine if you qualify for the nonrefundable LLC (a nonrefundable credit can reduce your tax, but any excess is not refunded to you).
If you don't qualify for the credits, you may qualify for a tax deduction; deductions are not as valuable as credits. Credits reduce your tax bill dollar for dollar. Deductions reduce your tax bill by a smaller amount (the amount of your income that is subject to tax). Deductions require you to fill out Form 8917, "Tuition and Fees Deduction" (http://tinyurl.com/oxqbcws).
Next week, I'll fill you in on some additional free resources on education tax breaks. In the meantime, if you would like me to email a copy of Wolters Kluwer's "Education Tax Breaks," email me at readers@juliejason.com.
