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Get in under the wire for education credit

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in Small Business Tax

It’s still unclear whether the tuition deduction, which expired after 2013, will be reinstated for 2014. But that doesn’t mean that parents can’t claim any tax benefits for children in college.

Strategy: Pay the tuition bill now for the upcoming semester. If the semester starts in January through March of next year, you can generally use the tuition expenses to claim one of two higher education credits for 2014, assuming you otherwise qualify.

However, the tax benefits phase out for certain upper-income taxpayers. Similarly, the tuition deduction was also reduced or eliminated for upper-income taxpayers while it was still on the books.

There are two tax credits for higher education expenses available to taxpayers for 2014. You can claim either credit if you qualify, but not both.

1. American Opportunity Tax Credit (AOTC). The AOTC is the souped-up version of the former Hope Scholarship credit. Currently, it equals the sum of 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000, for a total maximum credit of $2,500 per eligible student. Also, the AOTC now applies to the first four years of a student’s post-secondary education. (Prior to 2012, it was limited to two years.)

The AOTC phases out if your modified adjusted gross income (MAGI) exceeds certain limits. For 2014, the phase-out range is $80,000 to $90,000 of MAGI for single filers and $160,000 to $180,000 for joint filers.

2. Lifetime Learning Credit (LLC). The LLC is equal to 20% of the first $10,000 of qualified expenses, or a maximum of $2,000 per taxpayer. For instance, if a couple incurred $10,000 of qualified expenses for each of their three children, their total LLC would be limited to $2,000. Therefore, the AOTC is preferred if you have two or more children in school.

The LLC is also phased out based on your MAGI. For 2014, the phase-out range is from $54,000 to $64,000 for single filers and $108,000 to $128,000 for joint filers.

Finally, under a recent tax law change, you’re allowed to receive up to 40% of the value of the AOTC as a refund (up to a $1,000 maximum), even if you have zero tax liability. This tax break isn’t available with the LLC.

Tip: If your child has unearned income subject to the “kiddie tax,” none of the AOTC is refundable.

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