Who Qualifies for College Education Tax Credit? -Forbes | Team Cansler

There are several education tax breaks to help taxpayers pay for college. These include the American Opportunity Tax Credit (AOTC), Lifetime Learning Tax Credit (LLTC), Student Loan Interest Credit, Education Savings Bond Program, Coverdell Education Savings Accounts, and 529 College Savings Plans.

Some of these tax breaks include tax credits and others include an income exclusion, often referred to as a deduction. Each tax benefit has different eligibility restrictions and different definitions of eligible expenses. Some of the requirements are adjusted annually for inflation, others are not.

Eligible for tuition tax credits

There are two tax credits based on amounts spent on tuition and fees, books, supplies, and equipment for a student who is either the taxpayer, the taxpayer’s spouse, or a dependent claimed by the taxpayer on their federal income tax return . Other college expenses such as room and board or transportation are not eligible.

  • The American Opportunity Tax Credit (AOTC) offers a partially refundable tax credit of up to $2,500 based on 100% of the first $2,000 of qualifying expenses and 25% of the second $2,000 of qualifying expenses. Up to $1,000 (40%) of the tax credit is refundable, except to certain taxpayers who are under the age of 24 at the end of the tax year. The AOTC is limited to the first four years of post-secondary education and four tax years for each student. It is mainly used for undergraduate students. The student must be pursuing a degree or certificate and be enrolled at least part-time. Expenditures for study periods beginning in the first three months of the next tax year may be counted as incurred during the current tax year if the expenses were paid during the current tax year. The student must not have been convicted of selling or possessing controlled substances for a federal or state felony. Students cannot claim the tax credit for themselves if they are claimed as dependent on another person’s federal income tax return (such as their parent’s tax return). AOTC can be claimed for qualifying expenses paid for with student loans. Eligible expenses are also reduced by the tax-free educational support received for the same expenses.
  • The Lifelong Learning Tax Credit (LLTC) provides a non-refundable tax credit of up to $2,000 based on 20% of the first $10,000 of qualifying expenses. The LLTC is available for an unlimited number of years and is commonly used for graduate and postgraduate studies. The student does not have to be enrolled at least half a day.

Coordination restrictions prevent taking both the AOTC and LLTC for the same student in the same year.

Both tax credits have lost earnings of $80,000 to $90,000 for single parents and $160,000 to $180,000 for jointly filed marriages. Married taxpayers filing separately as married tax returns are not eligible. Lost earnings for the American Opportunity Tax Credit and Lifetime Learning Tax Credit are not adjusted for inflation.

Student Loan Interest Deduction Eligibility

The student loan interest deduction provides an above income exclusion for up to $2,500 in interest paid on qualifying educational loans. Qualifying educational loans include all government student loans and most private student loans.

The borrower may not be claimed on another person’s federal income tax return. The taxpayer must have had a legal obligation to pay the interest on the student loan. Interest paid by others is counted as if it had been paid by the borrower.

The student loan interest deduction has income deductions of $75,000 to $90,000 for singles and $155,000 to $185,000 for jointly filed marriages. Married taxpayers filing separately as married tax returns are not eligible.

Eligibility for the Education Savings Bond program

Interest on qualifying education savings bonds is tax-free when redeemed to pay qualifying education expenses or transferred into a 529 College Savings Plan, prepaid tuition plan, or Coverdell Education Savings Account. Qualified education expenses include tuition and required fees.

The qualifying education expenses must have been paid for the education of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent. The beneficiary of the 529 plan, prepaid curriculum, or Coverdell must be the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent. Qualifying expenses are reduced by the amount of tax-free educational grants that the AOTC or LLTC uses for the same expenses.

Eligible educational savings bonds include US Series EE Savings Bonds issued in 1990 or later and US Series I Savings Bonds. The Savings Bonds must be in the name of the taxpayer who was at least 24 years of age prior to the issuance date of the bond have to be.

To qualify for interest-free treatment, the bondholder must have income under income streams of $91,850 to $106,850 for single parents and $137,800 to $167,800 in the year that you redeem the bonds or transfer to a 529 plan have dollars for married people. Married taxpayers filing separately as married tax returns are not eligible.

Eligibility for Coverdell Education Savings Accounts

Income within a Coverdell Education Savings Account and distributions to pay qualifying educational expenses are tax-free. Qualifying education expenses include qualifying higher education expenses and qualifying elementary and secondary education expenses.

  • Qualifying higher education expenses include tuition and fees, books, supplies and equipment, computer equipment, peripherals, Internet access and software, room and board (with at least six-month enrollment), and expenses for special needs services.
  • Qualified primary and secondary education expenses include tuition and fees, books, supplies and equipment, academic tutoring, computer equipment, peripherals, Internet access and software, room and board, uniforms and transportation, and expenses for special needs services.

The annual contribution limit is $2,000 (combined) from all sources for all Coverdell Education Savings accounts for the same beneficiary. Excess contributions are subject to a 6% consumption tax. Contributions must end when the beneficiary turns 18, unless the beneficiary is a beneficiary with special needs. The Coverdell Education Savings Account must be paid off in full within 30 days of the beneficiary turning 30 years of age, unless the beneficiary is a beneficiary with special needs or the beneficiary dies.

Coverdell Education Savings Account contributors are subject to an income band of $95,000-$110,000 for single parents and $190,000-$220,000 for married couples filing jointly. Contributors filing separately as spouses are not eligible. Coverdell Education Savings Account income curves are not adjusted for inflation. (Contributions may also be made by corporations, trusts, and other organizations without regard to income.)

Coverdell Education Savings Accounts can be transferred to a 529 College Savings Plan, but not vice versa.

Eligibility for 529 College Savings Plans

Income from a 529 college savings plan and distributions to pay qualifying college expenses are tax-free.

Qualifying higher education expenses include tuition and fees, books, supplies and equipment, computer equipment, peripherals, Internet access, and software. Board and lodging (at least half-day occupancy) as well as expenses for special educational support. Eligible expenses also include up to $10,000 per year for elementary and secondary school tuition, expenses for specific educational programs (tuition, books, materials, and equipment), and up to $10,000 for student loan repayments (lifetime limit per borrower) for each beneficiary and the siblings of the beneficiary.

529 plans have no loss of earnings and no age limits. 529 plans have no annual contribution limits other than gift tax considerations. The annual gift tax exemption is $17,000 in 2023. Five-year gift tax averaging, also known as superfunding, can be used to make a flat contribution equal to five times the annual gift tax exemption and is treated as whether he has a five-year period. Total limits vary by state.

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