The cost of attending college can be a major financial burden on students and their families: The average tuition rate for a four-year degree is $45,370 at a private institution and $35,370 at an out-of-state public school, according to The College Board. You can expect to pay around $11,580 for a two-year degree from a public institution.
The American Opportunity Credit offers a tax rebate of up to $2,500 for eligible college-related expenses, and it’s available to students and parents. Follow these guidelines to claim the credit and get every tax break available to you.
Qualify for the Credit
Reduce the financial impact of college tuition by immediately decreasing your marginal rates with this tax credit. To qualify for the education tax credit, the student must meet these requirements:
- Is actively pursuing a degree at an accredited institution
- Has not finished four years of school at the beginning of the tax year
- Is enrolled at least half-time
- Has no felony drug convictions
Apply for the Credit
The college tax credit applies to the person who pays the tuition. If you paid qualified higher education expenses for yourself or for a student who is your spouse or your dependent, you can claim the credit. If a dependent you claim as an exemption paid for qualified education expenses, the IRS considers that paid by you.
The credit is valid for each student once during the calendar year. The taxpayer who claims the credit must make an adjusted gross income of less than $180,000 if filing jointly and $90,000 if filing individually. The credit amount is gradually reduced if your modified adjusted gross income is between $80,000 and $90,000 — or $160,000 and $180,000 if you file a joint return. You’re ineligible to claim an American opportunity credit if your MAGI is $90,000 or more — or $180,000 or more if you file a joint return.
All academic periods are eligible for the credit, including summer school, semesters, trimesters and quarters. Room and board, transportation, insurance and medical costs do not qualify for the credit.
Lifetime Learning Credit
The Lifetime Learning Credit is not as generous as the American Opportunity Credit, but you can claim it throughout your lifetime, whether you’re an undergrad, graduate student or older, nontraditional student. The credit offers a maximum of $2,000 per year. The same expenses qualify as those for the American Opportunity Credit, but the credit is nonrefundable, so you can’t use it if you don’t owe taxes.
To claim the Lifetime Learning Credit, you must submit a Form 1098-T, Tuition Statement, which schools mail to students by the end of January. The form shows the total amount of tuition and other educational expenses the school collected during the calendar year. You must also complete Form 8863 and attach it to Form 1040 or 1040A when you file. The deadline for applying for either of the education tax credits is the same as the regular tax due date — April 18, 2017.
The Maximum Credit Benefit
The American Opportunity Credit offers a maximum benefit of $2,500 per year. If the credit reduces a taxpayer’s marginal rate completely, 40 percent of the credit — up to $1,000 — is refundable. This means you can get a refund even if you owe no tax. The Lifetime Learning Credit, however, offers a benefit of up to $2,000 per year for educational expenses. It differs from the American Opportunity Credit in that you cannot get a refund if you have zero tax liability. You might be eligible to claim both credits for the same student in the same year, but the IRS entitles you to claim only one.