Education credits and deductions can be surprisingly complicated. Not only are there up to four different ways of claiming a deduction or credit for education expenses on your income tax return, you also have to consider who will claim the credit. Plus, you need to consider how the claim will affect your state income tax return.
Make sure that your tax preparer has considered all the available options and chosen the one that gets you the best tax position, whether it be a better tax refund or lower tax payable.
The four main ways to claim education expenses are:-
- American Opportunity Credit – For most people at college or with children at college this is the most beneficial of the credits as up to 40% of the credit may be refundable even if you have no net tax due. The maximum benefit of the other ones is the net tax due. It is only available for the first four years of post secondary education, so basically it is for undergraduates. Up to $4,000 of expenditure can be claimed per year per student, giving a maximum credit of $2,500. Unlike some of the other claims the expenditure can include equipment such as computers, books and supplies even if not purchased from the education institution.
- Tuition and Fees Deduction – This can be claimed for education expenses paid for higher education up to a maximum of $4,000 across all students per return. This deduction will often be beneficial for tax payers with higher marginal tax rates or high state tax rates.
- Lifetime Learning Credit – This one may be a beneficial claim for those that are claiming work related education expenses as it does not require you to be studying for any recognized education credential. The maximum expenditure to be claimed is $10,000 across all students per return with a maximum credit of $2,000.
- Work Related Deduction on Schedule A – This is usually the last resort claim because it is only claimed on Schedule A which requires you to be itemizing rather than claiming the standard deduction. It also is part of the category of expenses that must exceed 2.5% of your adjusted gross income before you get any tax benefit.
Note that there are other qualifying conditions for each claim such as Adjusted Gross Income limits and whether the education expenses are paid for with scholarships or grants. Your tax preparer will go through these with you.
Who claims the deduction or credit varies for each claim and often hinges around who claims or could claim a dependent. This is particularly relevant for parents with children at college. They may automatically assume the children are still their dependents but this is not always the case. The tax preparer will need to work through the detailed rules to see if they are a dependent and whether the parent or student should claim the education expenses.
Also, be careful with the American Opportunity Credit to make sure all the qualifying conditions have been satisfied and the correct person is claiming the credit. The IRS has already identified a large number of invalid claims for the first two years that this credit has been available. You do not want to be in the position of repaying the credit to the IRS together with penalties and interest.
As you can see each possible claim has different qualifying conditions and different impacts on the tax return which is why each possible claim needs to be checked to see which one is the best for you.
If you have any education expenses for you or your children to claim and are ready to prepare your income tax return call us on (480) 363-4808 to book an appointment. If you live in Chandler, Tempe, Mesa, Gilbert or Queen Creek, AZ we will come to you to prepare your income tax return. If you live elsewhere we can prepare the tax return using information you upload to our secure client portal or mail to us. We look forward to helping you prepare your income tax return.
Disclaimer – This article does not constitute personal tax advice to the reader and is only offering general information. You should seek professional advice for your own situation as the most appropriate tax planning depends on your personal and unique circumstances.
Posted By Mark Smith
Mark Smith, EA is an Enrolled Agent and accountant with over 30 years tax and accounting experience. He is the owner of Cranmere Accounting and Tax Services LLC. He can be contacted on (480) 363-4808 or by email at firstname.lastname@example.org if you need assistance with any of the above.