Taxpayers who have to write big checks for higher education can see tax savings when filing tax returns next year. If a family member is taking postsecondary coursework, there’s a strong chance a tax benefit may be in their future. The credits available are the American Opportunity Tax Credit and the Lifetime Learning Credit.
Here are the major points of the AOTC:
The worth of the credit is dependent on income:
And here’s what clients need to know about the Lifetime Learning Credit:
Like the AOTC, it is subject to income limits:
The various provisions, especially the phase-out limits, are subject to change, so be sure to consult authoritative sources for the latest details.
Qualified expenses for the AOTC include tuition, required enrollment fees and course materials needed for the course of study, whereas for the LLC, the only qualified expenses are tuition and fees for enrollment or attendance. Qualified expenses can be paid for by an immediate family member or a third party such as a relative or friend.
What is the story on deductions?
Before 2017, the IRS offered a tuition and fees tax deduction. That deduction has expired, but a person can claim it for a relevant year by filing an amended return. They can deduct up to $4,000 from their gross income for money spent on eligible education expenses, including tuition, fees, books, supplies and other purchases the school requires. Personal expenses like transportation and room and board don’t qualify.
The Tuition and Fees Deduction can’t be claimed in the same tax year that the AOTC or the LLC is claimed for the same student. While the TFD reduces adjusted gross income, the AOTC generally provides a greater tax benefit for most individuals. As the IRS notes, “You can claim all three benefits on the same return but not for the same student or the same qualified expenses.”
This is just a summary of complex provisions. Be sure to consult a qualified professional to find out how to maximize the benefits for a specific situation:
https://flowersrieger.com/a-2021-update-on-tax-and-education-credits/
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