Back-to-School Tax Credits
Posted by William Byrnes on September 15, 2014
The IRS revealed in its Summertime Tax Tip 2014-23 that some of the costs a taxpayer pays for higher education can lead to a taxpayer owing less tax. Here are several important tax facts about “education tax credits” from the IRS:
- American Opportunity Tax Credit. The AOTC can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means a taxpayer may be able to get up to $1,000 of the credit as a refund payment from the IRS, even if no tax is owed.
- Lifetime Learning Credit. With the LLC, a taxpayer may be able to claim a tax credit of up to $2,000 on the federal tax return. There is no limit on the number of years the LLC can be claimed for an eligible student.
- One credit per student. A taxpayer may claim only one type of education credit per student on the federal tax return each year. If more than one student qualifies for a credit in the same year, then the taxpayer can claim a different credit for each student.
- Qualified expenses. A taxpayer may include qualified expenses to calculate the credit. This may include amounts paid for tuition, fees and other related expenses for an eligible student.
- Eligible educational institutions. Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.
- Form 1098-T. In most cases, a taxpayer will receive Form 1098-T, Tuition Statement, from the school. This form reports the qualified expenses to the IRS and to the taxpayer. A taxpayer may notice that the amount shown on the form is different than the amount actually paid. Some of the paid costs may not appear on Form 1098-T. For example, the cost of textbooks may not appear on the form, but these textbook costs still may be able to be claimed as part of the credit.
- Nonresident alien. A F-1 student visa usually files a federal tax return as a nonresident alien. A nonresident alien may not claim an education tax credit for any part of the tax year unless electing to be treated as a resident alien for federal tax purposes.
- Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on the taxpayer’s income.
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