Pursuing higher education is the most beneficial decision you can take for yourself, providing new job prospects, better earning possibilities, and overall personal development. But at the same time, the costs of getting education, including college tuition and the purchase of necessary books, can be heavy for your personal or family budget. Luckily, the US Tax system provides you with many financial incentives that are meant to cover these growing educational costs.
Filing taxes is a complicated procedure that takes into account all the nuances of tax policy and IRS requirements, and it may seem daunting at first. Our team from JusKliq knows how to navigate this maze for you and ensure that you will get the maximum benefit from your tax return. Learning everything about education tax credits allows you not to miss any of your money during your tax filing. Here’s a guide explaining what are education tax credits and available tax credits for education.
Understanding Education Tax Credits: What Are They?
In the tax season, there is a tendency among taxpayers to mix up tax deductions and tax credits. Whereas tax deduction reduces your overall taxable income, tax credit results in dollar-to-dollar reduction of your tax payable. Some tax credits may be partly refundable, allowing you to get money refunded to you even if you have not paid any taxes.
The Federal tax credit for education is offered to ease the burden on families and individuals resulting from escalating education costs incurred in eligible educational institutions. In order to be eligible for the credits, one must be taking a qualifying course that offers academic credits at least half time and get a form 1098-T from the educational institution.
Exploring the Top Tax Credits for Education
The IRS provides two primary credits designed to assist with higher education expenses. Familiarity with the criteria for each will help you determine which one results in the most favorable monetary gain.
1. The American Opportunity Tax Credit (AOTC)
The AOTC has been developed for use by students in the first four years of college studying an accredited undergraduate degree or certificate program.
- Maximum Benefit: The maximum credit for which you can qualify is $2,500 per year per eligible student.
- Qualified Expenses: Tuition, fees, course materials, and required books.
- Refundable: Up to 40 percent of the AOTC credit (a maximum of $1,000) is refundable; in other words, if the credit lowers your tax liability to zero, you will receive a direct cash refund of the difference.
- Modified Adjusted Gross Income (MAGI): To claim the maximum AOTC credit, your MAGI must not exceed $80,000 ($160,000 for joint filers).
2. The Lifetime Learning Credit (LLC)
In contrast with the AOTC, the LLC is open to both undergraduates and non-undergraduates in any educational program, including classes taken for the purpose of improving or developing job skills.
- Maximum Benefit: Up to $2,000 per return (this is 20% of the first $10,000 of qualified tuition and related fees paid).
- Number of Years: There is no limitation on the number of years in which you may claim the LLC.
- Non-refundable: The LLC can lower your tax liability to zero but the unused portion of the credit will not yield a direct cash refund.
Key Differences: AOTC vs. Lifetime Learning Credit
To help you determine which credit aligns with your academic standing, review how the American Opportunity Tax Credit and the Lifetime Learning Credit differ in structural application:
- Target Academic Level: AOTC applies only within the first four years of higher education to earn an undergraduate degree or certificate. On the other hand, Lifetime Learning Credit applies for any level of higher education whether undergraduate, graduate, or professional degrees and/or for any class or training that improves one’s skills.
- Dollar Caps: AOTC has an annual limit of up to $2,500 per student eligible for it. Lifetime Learning Credit has an annual limit of up to $2,000 per return.
- Eligible Expenses: AOTC includes tuition, required fees, required books, and supplies. Lifetime Learning Credit includes tuition and required fees that are required as part of the enrollment process.
- Refundability: AOTC is partially refundable and up to $1,000 refund can be made in case tax liability is reduced to zero. Lifetime Learning Credit is not at all refundable.
- Limitations on Duration: AOTC applies only within four tax years per eligible student. There is no limitation on duration of using Lifetime Learning Credit.
How to File and Claim Your Education Tax Credits
However, it is important to know how to properly collect those credits. Here is what you should do in order to simplify your procedure of filing taxes:
- Collect Your Form 1098-T: The college/university will mail Form 1098-T in January or February, and it will show your payments for the qualified education expenses. Check this form carefully.
- Collect Receipts for Books and Supplies: For claiming the AOTC, collect the receipts for the expenses paid for the books and other supplies purchased from the outside and not covered by the school itself.
- Fill Out the Form 8863: Fill out Form 8863 (Education Credits: American Opportunity and Lifetime Learning Credits) while preparing your tax return and get the accurate calculation of your credit.
- Check Income Limitations: Make sure that your modified adjusted gross income (MAGI) is within the range of the IRS for the particular tax year.
Maximize Your Education Savings
An investment in your education is an investment in your future, but you don’t have to figure out the money problems by yourself. Using tax credits can save you thousands of dollars and help take some stress off your shoulders about paying for tuition and school expenses.
Looking for personalized assistance? Connect with JusKliq today, and let our tax professionals ensure you claim every credit you deserve with total confidence.
