Content
To be considered tax-free, scholarships can’t exceed your education expenses or be used to pay for expenses such as room and board or travel. Starting in 2024, up to $35,000 (lifetime limit) can, under a provision in the SECURE 2.0 Act, be rolled over from a 529 plan to a Roth IRA. So, your child or grandchild might be able to eventually benefit from your 529 contributions, even if they don’t use the funds for education.
You can’t take more than one education benefit for the same student and expenses. For example, you cannot claim both the AOTC and the LLC; you can only claim one. The American Opportunity Credit can save you up to $2,500 in tax for the education expenses of each eligible student.
Eligibility requirements for education tax credits
This credit acts as a tuition tax credit; while it does not get paid in advance, you can claim it on your taxes. When you add your school information to your eFile account, the tax app will determine the best credit for you to claim and apply it to your return. EFile will only claim the credit if you qualify for it based on your entries; sign up for free here.
Your school will send you Form 1098-T, your tuition statement, which you can use to fill out Form 8863 and claim the tax credit. Further down on this Web page are some links to additional information on the American opportunity and lifetime learning credits. You can’t claim the AOTC if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes.
What Are the Major Differences Between the AOTC and the Lifetime Learning Credit?
When you prepare your return on eFile.com, you will be able to enter the information right from your 1098-T and we will generate the forms necessary to claim either education credit on your tax return. Because tax credits are more beneficial and take less effort to claim, the IRS has done away with the Tuition and Fees Deduction. This is because that deduction required that the student tracks purchases in order to write off their education expenses whereas claiming a tax credit is much more straight forward.
- Or if a parent claims you as a dependent, the credits can lower your parent’s tax liability for the year.
- For 2022 Returns, the American Opportunity Credit and Lifetime Learning Credit are the two federal tax credits available for students and parents of students.
- The Modified Adjusted Gross Income (MAGI) is the adjusted gross income as calculated on a taxpayer’s federal income tax return, which is typically the amount after allowed deductions are taken.
- This means that the credit can reduce your tax liability to zero, but it cannot be refunded to you beyond that point.
The student will receive a Form 1098-T, Tuition Statement, from the educational institution if it is an eligible school as defined by the IRS. The credit begins to phase out at a modified adjusted gross income (MAGI) https://turbo-tax.org/what-are-education-tax-credits/ of $80,000 for single filers and $160,000 for married taxpayers filing jointly for full credit. Single taxpayers with a MAGI of more than $90,000, or MFJs with a MAGI over $180,000, cannot claim the credit.
Claiming the Credits
This means you cannot write off a laptop, books, or other educational expense on your 2022 Return; instead, you can claim a tax credit. With rising costs of tuition, college students are always looking https://turbo-tax.org/ for ways to save money both on their income tax return and on general daily expenses. If you have debt from student loans, keep up with details on the $10,000 – $20,000 student loan forgiveness.
- This influences which products we write about and where and how the product appears on a page.
- Credits directly reduce the amount of income tax owed, while deductions reduce the amount of taxable income upon which taxes are computed.
- Qualified expenses include tuition and any fees paid directly to the school for books, supplies, or lab fees.
- Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.
- Qualified education expenses for the LLC include tuition, fees, books, and required course supplies.
- Only one of the two credits can be claimed for each student in a given tax year.
- For more little-known truths about these programs, visit our individual tax credit and deduction fast facts.
The examination may or may not result in a change to your tax or credits. You can also save money on taxes by keeping track of your spending, understanding your deductions, maximizing tax-free income, and using tax software to claim all credits and deductions you are entitled to. Michael is a sophomore in University V’s degree program in landscape architecture and living in the dorms.
What is the American Opportunity Tax Credit?
Tax credits and the NC 529 Plan are smart ways for families to lower the cost of post-secondary education and maximize their tax dollars! To learn more about the tax benefits of the NC 529 Plan, or to open an account, visit our website. As you get ready to file your tax return, consider working with a tax professional to help you navigate your 2021 tax situation. The amount of the credit is up to $2,500, calculated as 100 percent of the first $2,000 spent on qualified expenses, plus 25 percent of the next $2,000 you spend. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site.
- So, unlike the American Opportunity Credit, the qualified fees are only those which are paid directly to the school.
- If you have debt from student loans, keep up with details on the $10,000 – $20,000 student loan forgiveness.
- We do not include the universe of companies or financial offers that may be available to you.
- To qualify for the deduction, your MAGI must be less than $80,000 ($160,000 if married filing a joint return).
You can use this information to calculate the value of your deduction. To deduct student loan interest, you must have taken out the loan solely to pay qualified education expenses for you, your spouse, or a person who was your dependent at the time you took out the loan. The American Opportunity tax credit (AOTC) is an education tax credit available to people who are currently enrolled in college courses.
What is an education tax credit? The basics
You cannot claim the AOTC and the LLC for the same student in the same year. If you qualify for both tax credits, financial experts recommend you take the AOTC because you get a larger tax refund. You may want to discuss your options with a financial advisor to determine which tax credit is right for your family.
Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy.