Monday, September 22, 2014

Back-To-School Blues & Tax Credits To Go With It!!

After the horrible 2013 winter doomed by one polar vortex after another, we couldn't wait for summer to get around. It did finally arrive but amazingly was gone in the blink of an eye! I am always amazed by how quickly every summer flies by and before we know it, school is back in session. This year, summer was a huge deal in our household, we had a kid to send off to college!  

Handy-dandy tax consultant that I am, with major life events, tax planning cannot be far behind. So, I thought I should remind my readers of the the college tax credits that are out there for 2014. Now would be a perfect time to see if they would qualify for college credits. 

American Opportunity Tax Credit {AOTC} & The Lifetime Learning Credit {LLC}:  These credits are available to those taxpayers who pay qualifying expenses for an eligible student. 

The AOTC  provides a credit for each eligible student while the LLC provides a maximum credit per tax return.  A taxpayer may qualify for both these credits in the same year but can claim one of them for a particular student in a particular year. 

The above credits are claimed on Form 8863 and it doesn't matter whether the taxpayer itemizes or takes the standard deduction. 

For those eligible to take the college tax credits, including under-graduate students, the AOTC generally yields higher tax savings. The LLC is favored by those who are part-time students or are attending graduate school. 

The AOTC can yield a maximum annual credit of $2500 per student. It equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

40% of the AOTC credit is refundable, that means even those who do not owe any tax can get an annual payment of $1,000 for each eligible student. 

The LLC can yield a maximum annual credit of $2,000 per tax return. 

Who is an eligible student?: An eligible student
  • Includes the taxpayer, the spouse and dependents. 
  • Is enrolled in an eligible college/ university/ vocational school whether a non-profit or for-profit institution. 
  • Cannot be a non-resident alien/ married but filing a separate return/ can be claimed as a dependent on another tax return. 
What are qualified education expenses?:  Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Expenses such as for room and board are NOT qualified expenses. 

Limits on the AOTC: The following limits exist, 
  • It is available only for 4 years per eligible student.
  • It is available only if the student has NOT completed the first 4 years of post-secondary education before 2014. 
  • The student must be enrolled at least half-time in college. 
  • The taxpayers modified adjusted gross income (MAGI) for 2014 should be $80,000 or less if filing single, head of household and $160,000 or less if filing married filing joint to claim full credit. 
  • The credit is completely phased out for taxpayers with MAGI of $90,000 for single and head of household and $190,000 for those married filing jointly. 
Limtis on the LLC: The following limits exist for the Lifetime Learning Credit,
  • The limit on the LLC applies per tax return. 
  • The full $2,000 credit is available only to those who pay $10,000 or more in qualifying tuition and fees and have sufficient tax liability. 
  • The full credit can be claimed for 2014 for those with MAGI $54,000 or less and married filing jointly, $108,000. The credit is completely phased out for taxpayers with MAGI $128,000 filing married & jointly and $64,000 for singles, heads of household etc. 

Other education tax benefits include: 
  • Scholarships and grants- Tax free if used to pay for tuition and fees, books, and other course materials. 
  • Student Loan interest deduction- up to $2,500 per year subject to MAGI limits.
  • Savings bonds used to pay for college- Interest is tax free on Bonds purchased after 1989 by a taxpayer, who at the time was at least 24 years old. 


  • Qualified tuition programs also known as 529 plans. 
Note: The Tuition and Fees deduction as an adjustment to your total income is no longer available from the tax year 2014. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com