Educate yourself about the revised tax benefits for higher education
Going to college is one of the biggest financial investments you’ll make. Wouldn’t it be great to see some returns on it before graduation? 415 Group Senior Manager Brian Raber, CPA, MT, explains how education tax credits can make a difference on your tax returns.
When it comes to the changes in higher education tax credits and deductions, along with the differences between them, you want to choose the option that works best for you. Combined with scholarships and other financial incentives, they make tuition a little more affordable.
Each year, you’ll want to decide which is better for you to take advantage of: the American Opportunity Tax Credit or the Lifetime Learning Credit. Often, if students are eligible for the American Opportunity Tax Credit—which is more restrictive—they will use that credit for the first four years, and then switch to the Lifetime Learning Credit beyond that.
The American Opportunity Tax Credit requires students to be pursuing a degree within their first four years of college to qualify. Other stipulations include students being enrolled at least halftime and not having any felony convictions.
For the Lifetime Learning Credit, as long as a student is taking higher education courses, they will most likely qualify for the tax break. This could be a great opportunity for those wanting to continue their education right after graduating or even later in life.
Wondering what happens if your parents are paying for college? If you’re listed as a dependent on their tax returns, they can take advantage of these credits. There could be some issues if your grandparents or someone else is paying for your education—for example, the funding could be categorized as a gift if it’s not paid directly to the college.
With the Consolidated Appropriations Act, the modified adjusted gross income (MAGI) amount for the Lifetime Learning Credit was increased to match the American Opportunity Tax Credit’s level. Going forward, the two credits will be more comparable.
The act also removed the Tuition and Fees Deduction after 2020. This had been confusing for those filing taxes on their own, because a $4,000 deduction can initially sound better than a $2,000 or $2,500 credit. A credit is a dollar-for-dollar reduction of the income tax owed, while a deduction only lowers taxable income. In a lot of cases, people weren’t optimizing their credits and deductions and therefore not getting the most out of them.
This is why it’s so important to work with a trusted advisor. They can look at the various education tax credits and deductions, compare them with your situation, and find the best fit. Accountants such as those at 415 Group can help you get the most tax savings.
Contact us today for more information on American Opportunity Tax Credit, Lifetime Learning Credit, and other education tax opportunities.