You may have received Form 1098-T (Tuition Statement). This form will show the amount of the tuition that was billed by the institution – and does NOT include all of the other “qualified” expenses that you may have paid. The information on this webpage was taken from other sources at different times. Always check for the most current information on the IRS website (www.irs.gov). For instance, the Modified Adjusted Gross Income (MAGI) limitation usually increases annually. This limitation can limit or eliminate the deduction or credit for educational expenses.
By the way, the IRS’s position regarding 1098-T is that it is not acceptable documentation for educational expenses. Some taxpayers mistakenly believe the form serves as a record of educational expenses paid. However, the form, issued by universities, only documents tuition that the school billed, not what the student paid. Taxpayers who don’t keep good records of their education expenses could be robbing themselves of money. Therefore, keep evidence (canceled checks, credit card statements, invoices) for educational costs paid during the tax year.
Here is a comparison of the two credits currently available from the IRS website (NOTE – this was a 2012 chart; the numbers will have changed for future years):
2014 Education Credits and Tuition Deduction Comparison
|Criteria||AOTC||LLC||Tuition and Fees Deduction|
|Maximum credit or benefit||Up to $2,500 credit per eligible student||Up to $2,000 credit per return||Up to $4,000 taxable income reduction per return|
|Refundable or nonrefundable||40% of credit||Not refundable||Does not apply|
|Limit on MAGI* for married filing jointly||$180,000||$128,000||$160,000|
Limit on MAGI* for single, head of household, or qualifying widow(er)
|Can you file married filing separately?||No|
|Dependent status||Cannot claim credit if you are claimed as a dependent on someone else’s return|
|Must you or your spouse be a U.S. Citizen or Resident Alien?||Yes, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status)|
|Number of years of post-secondary education available||Only if student hasn’t completed 4 years of post secondary education before 2014||All years of post secondary education and for courses to acquire or improve job skills||All years of post secondary education|
|Number of tax years credit available||4 tax years per eligible student including any years former Hope credit claimed||Unlimited||Unlimited|
|Type of program required||Student must be pursuing a degree or other recognized education credential||Student does not need to be pursuing a degree or other recognized education credential||Student must be enrolled at eligible educational institution for one or more courses|
|Number of courses||Student must be enrolled at least half time for at least one academic period beginning in 2014||Available for one or more courses||Available for one or more courses at eligible educational institution|
|Felony drug conviction||No felony drug convictions as of the end of 2014||Does not apply||Does not apply|
|Qualified expenses||Tuition, required enrollment fees and course materials needed for course of study||Tuition and fees required for enrollment or attendance||Tuition and fees required for enrollment or attendance|
|Whom can you claim the benefit for?|
|Who must pay the qualified expenses?|
|Payments for academic periods||Made in 2014 for academic periods beginning in 2014 or the first 3 months of 2015|
|Do I need to claim the credit or deduction on a schedule or form?||Yes, Form 8863, Education Credits||Yes, Form 8863, Education Credits||Yes, Form 8917, Tuition and Fees Deduction|
Here is an overview released in a “Tax Tip” by the IRS that discusses the available tax deductions and credits pertaining to educational expenses:
Whether you’re a recent graduate going to college for the first time or a returning student, it will soon be time to get to campus – and payment deadlines for tuition and other fees are not far behind. The Internal Revenue Service reminds students or parents paying such expenses to keep receipts and to be aware of some tax benefits that can help offset college costs.
(1) American Opportunity Credit This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return.
(2) Lifetime Learning Credit In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).
(3) Tuition and Fees Deduction This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
(4) Student loan interest deduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.
For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.
You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
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Here is some additional information about the two forms of education credits available for 2010 through 2012.
Two Tax Credits to Help Pay Higher Education Costs
There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents. These are the American Opportunity Credit and the Lifetime Learning Credit.
To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.
For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.
However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.
Here are some key facts the IRS wants you to know about these valuable education credits:
1. The American Opportunity Credit
2. Lifetime Learning Credit
You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
Here is some additional information on the American Opportunity Credit:
American Opportunity Credit
Audio file for podcast: Education Tax Breaks
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses.
The American Opportunity Credit was not available on the 2008 returns taxpayers are filing during 2009. This relatively new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.
The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.
The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.
Generally, you can claim the Hope credit if all three of the following requirements are met:
You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.
Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.
Tuition and Fees Deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.
You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.
Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:
You cannot claim the tuition and fees deduction if any of the following apply:
Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return) [these are the 2016 MAGI limitations – they usually increase annually], there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.
Qualified Student Loan
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
Loans from the following sources are not qualified student loans:
You can read the current information on this topic on the IRS website by clicking here.
Qualified Education Expenses
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:
The cost of room and board qualifies only to the extent that it is not more than the greater of:
Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.
If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.
Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.
To claim a business deduction for work-related education, you must:
Qualifying Work-Related Education
You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:
However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:
You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.
Education Required by Employer or by Law
Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.
When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.
If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.
Section 529Savings Plans
529 Plans Expanded
Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. These 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is at least a half-time student, room and board also qualify.
For 2009 and 2010, the ARRA change added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.
States sponsor 529 plans that allow taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student’s qualified education expenses.
Coverdell Education Savings Account
This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about distributions from Coverdell accounts:
For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.
Scholarships and Fellowships
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.
A scholarship or fellowship is tax free only if you meet the following conditions:
Qualified Education Expenses
For purposes of tax-free scholarships and fellowships, these are expenses for:
However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Expenses that Don’t Qualify
Qualified education expenses do not include the cost of:
This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.
For more information, see IRS Publication 970.
Exclusions from Income – Employer Assistance
You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.
Employer-Provided Educational Assistance
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.
Educational Assistance Program
To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.
Educational Assistance Benefits
Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.
Benefits over $5,250
If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.
Working Condition Fringe Benefit
However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Questions and Answers
If you still have questions about the American Opportunity Credit, these questions and answers might help.
2016 TAX COURT CASE – PURCHASE OF A COMPUTER FOR EDUCATION
Cost of Laptop Ineligible for American Opportunity Credit (AOC): A taxpayer bought a laptop computer for $1,288 that he used for this English project. He took a deduction for the computer as an American Opportunity Credit on the Form 8863. The credit was disallowed by the IRS, and the disallowance was affirmed by the U.S. Tax Court. The computer purchase was NOT REQUIRED as a condition of enrollment by the college. Djamal Mameri, TC Summary Opinion 2016-47.
As an addendum, the taxpayer likely could have used a 529 plan to purchase the computer since those plans allow for tax-free expenditures for computers and Internet access (providing the primary purpose is for education).