This Tax Tip Spotify Podcast and/or WordPress Blog Post understands that you are interested in any tax benefits that may assist you in paying for your education. There are two tax credits available to help you offset the costs of higher education:
- the American opportunity credit, and
- the Lifetime learning credit.
Tax credits are more favorable than deductions because a tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The two education tax credits have different features, requirements, and restrictions. Neither credit can be claimed if your filing status is married filing separately. In any particular year, you can only claim one of the two credits, but not both. Choosing the right one will depend on several factors.
Under the American opportunity credit, you can claim a tax credit of up to $2,500 for qualified education expenses for each eligible student. Forty percent of this credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess is refunded to you.
The American opportunity tax credit is available only for the first four years of postsecondary education. You must be pursuing an undergraduate degree or other recognized education credential in order to claim the credit. Qualified education expenses for which the credit is allowed include tuition and fees required for enrollment, and course-related books, supplies, and equipment.
The lifetime learning credit is allowed for all of your postsecondary education, not just the first four years. It is also allowed for all courses taken to acquire or improve job skills. However, the credit is limited to $2,000 per tax return and cannot be claimed if your adjusted gross income is above a threshold amount.
If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim one of the education credits for your dependent’s expenses for the year. For you to claim the credit for your dependent’s expenses, you must claim an exemption for your dependent.
In addition to these tax credits, you can deduct up to $2,500 of student loan interest in computing adjusted gross income. This means you do not have to itemize to take this deduction. And there are a number of requirements that apply to the deduction.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05012021-1 320-296)