Educate Yourself Here About Education Tax Credits
Anyone who has paid for college or looked into college knows that higher education is expensive. If you have paid for college in the past year, you may be eligible for a credit or deduction. There are some qualifications to be entitled to these deductions and credits. Continue reading to find out more about these opportunities.
What Is Education Tax Credit?
If you are asking yourself what an education tax credit is, it is a credit that can help offset the cost of higher education because it reduces the amount of the tax you owe on your tax return. If the credit reduces your taxes to below $0, you may be eligible for a refund on your taxes. However, there are some education credit eligibility requirements you must meet to qualify for these credits. The two potential credits include the American Opportunity Tax Credit and the Lifetime Learning Credit.
American Opportunity Tax Credit
The American Opportunity Credit can be worth up to $2,500, providing you paid that much in expenses for your undergraduate program.
The first $2,000 is for the money spent on tuition, fees, supplies, and books. It cannot be used for transportation or living expenses. You can then receive up to 25% of the next $2,000 for a total of $2,500. This credit is only for undergraduate students and the parents of undergraduate students.
This credit can be applied to your taxes for as many as four years. If parents pay for the expenses, they can receive the credit as long as the students are listed as dependent on the same tax return.
Other criteria include the filer's modified adjusted gross income (MAGI). This amount changes if you are single or filing jointly with a spouse.
In 2021, the amount was $80,000 for a single filer or $160,000 for a joint filer. For an individual, if the MAGI is between $80,000 and $90,000 for a single filer or between $160,000 and $180,000 for a joint filer, you can get a reduced credit. If your earnings are higher than what is listed, you will not receive any credit.
Lifetime Learning Credit
The Lifetime Learning Credit is eligible for the first $10,000 you paid for tuition and fees in 2023. After that, you can only claim 20%, up to $2,000.
This credit does not count for living expenses or transportation. Undergraduates, graduates, vocational students, and non-degree students may be eligible for this credit. There is no limit to the number of years one can claim it on their taxes. You could claim this credit even if you claimed the American Opportunity Credit on previous tax returns. However, you cannot claim both of these credits in the same tax year.
If you are a single filer and your MAGI is less than $80,000, you may be eligible for this credit. The amount increases to $160,000 for joint filers.
If you have a MAGI between $80,000 and $90,000, a single filer, you can only get a reduced credit. If you are a joint filer, those amounts are $160,000 to $180,000.
If you have no income or do not owe any taxes, you cannot receive a refund for the Lifetime Learning Credit.
Education Tax Forms
When you are considering education tax credits, there are specific forms you need to fill out. You also may require documentation to supply when you file your taxes.
For example, your school sends a form every January that shows how much you have paid in expenses for your education. The form the school sends is Form 1098-T. This is a tuition statement that can be used for your tax returns. The amount on this form is what you enter on your tax return for your education credit or deduction. If you paid any students loans, you might be able to deduct the interest of the student loans from your taxable income. When you pay more than $600 in interest, you automatically receive Form 1098-E. Even when you spend less than $600, you can still deduct the interest, but you may need to request the form.
Additional Deductions
There are some other benefits that you may be eligible for when you pay for higher education.
If you redeem savings bonds that are Series EE or I, and you received interest, you may not have to pay taxes on the interest.
There are earnings limits on those who can receive this deduction:
When you are a single filer, and your adjusted gross income is more than $83,200 and $124,800 for a joint filer, the tax deduction starts to phase out.
In addition, any interest earned on a 529 education savings plan or a Coverdell savings account is not taxable if the money is used to pay for higher education.
Who Can Claim Education Tax Credits?
Each credit has its own rules, but there are three criteria that you must meet for both credits in addition to their own requirements:
The first of the three criteria is that you, your dependent, or a third party must pay qualifying education expenses for credit for higher education.
The second criteria is that one of the listed individuals must be enrolled at an educational institution that is eligible for the credit.
The last criteria are the student must be you, your spouse, or a dependent that is listed on your tax return.
There are some people that do not qualify for the education credit:
These individuals include another person that is listed as a dependent on your tax return, like a parent.
If you file your tax returns as married but filing separately, you are not eligible for an education credit.
If you have already claimed another higher education benefit, you cannot claim a second one. You can only claim for one credit.
If you or your spouse were a non-resident alien for any part of the filing year and did not choose to be a resident alien for taxes, you are not eligible for these credits.
What Is the Difference Between a Credit And a Deduction?
There is a difference between tax credits and tax deductions. A tax credit is when you receive a reduction in your income taxes. A credit is typically dollar for dollar.
This means that if the credit is $2,000 and you owe $2,000, it brings the amount you owe to $0. The American Opportunity Tax Credit is one of them. A nonrefundable credit means that it can reduce what you owe for your taxes to $0. However, if there is any money leftover from the credit, you do not get the additional money. A refundable tax credit also can reduce the money you owe to $0. However, if there is money left over from the credit beyond what you owe, you can receive a credit. For example, if you owe $1,200 and your tax credit is $2,000, it takes what you owe down to $0 but also gives you a refund of $800.
A tax deduction is when your liability is reduced.
When the deduction is added to your tax return, it can reduce how much you have earned. An example of a tax deduction is when you deduct expenses that you pay for to run your business.
Need More Help?
When it comes time to file your taxes, it can be a stressful time. No one wants to pay taxes, but even more, no one wants to pay any more than they have to. You do not want to take the chance of missing out on any deductions or credits for which you may be eligible. When you miss these critical deductions, you could pay a lot more than you should.
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Conclusion
When you pay for higher education, you pay a large amount of money to further your education or the education of a dependent. The good news is that you may be eligible for education tax credits or deductions. However, it can be confusing to find the accurate information that you need to help you get the maximum deduction you can receive on your taxes. When you know where to find the best information, you can ensure that you are getting the maximum credits you are due.
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