Tax time is usually not the most favored time of the year. Tax credit results in a direct reduction in tax liability. Education credits are mostly misunderstood and not fully used up. Amounts spent on tuition qualify as education credits, while money spent onboarding, books or any student activity fees do not count towards an education credit.
The tax laws reduce the impact of bulk college expenses with two credits. Eligible taxpayers can claim credit of 100% of the first $2000 of qualifying expenses and 25% of the next $2000 of qualifying expenses under the American Opportunity Credit. A maximum of $2500 per student for each of the first 4 years can thus be claimed as credit.The Lifetime Learning Credit allows the taxpayer a credit of 20% of up to $10,000 of qualifying higher expenses with a maximum of $2000 per year. If you have spent $10,000 on tuition, the tax liability can be reduced by $2000 by availing the Lifetime Learning Credit. If there are two children in school, and you spend $7,000 on one child and $3,000 on the other, a $2000 Lifetime Learning Credit can still be claimed.Both these credits cannot be claimed for the same student in a tax year.
These credits are allowed for qualified expense payments beginning the same tax year of payment. However, for instance, if College X charges Taxpayer Y $2,000 in qualifying expenses to attend classes beginning March 2014, and Taxpayer Y pays the college in December 2013, Taxpayer Y may claim an education credits in 2013 for the 2014 education expenses. On the other hand, if Taxpayer Y makes the $2,000 payment in January 2014, the general rule applies and the payment is creditable in 2014.
Education credits may be claimed for qualified tuition and related expenses met with loan proceeds. The credit can be claimed in the year payment is made with the loan proceeds, and not the year when the debt is incurred or repaid.If a taxpayer does not know the date the college credits the student’s account, the qualifying expenses can be treated as paid on the last date for payment prescribed by the college.
If a client claims a student as a dependent, the student’s expenses can be claimed as education credit. Moreover, any expenses paid or deemed paid by the student are treated as paid by the client when figuring the credit. For instance, a client can claim an education credit for college expenses paid by a dependent student with earnings from a summer job or from college loans in the student’s name.
If a third party makes payment directly to an eligible educational institution for a student’s education expenses, the student is deemed to be receiving payment from a third party and paying the expenses to the institution. Hence, if the client claims the student as a dependent, the payments can be taken into account while calculating credit.
However, if the student is not claimed as a dependent on the client’s return, the student can claim an education credit on his or her return. Moreover, payments made by the client for the student’s expenses can be counted towards the credit on the student’s return.
If you have questions about how education credits will impact your specific circumstances or would like to schedule an appointment, please email info@gkmtax.com.
