Many tax filers pay education expenses for themselves or for their children. There is more than one potential tax treatment for the cost of education. Tax filers can usually obtain the most advantageous tax outcome by conceptualizing a hierarchy in which the various options are ranked relative to their financial benefit.
American opportunity credit
The most preferred tax benefit for the cost of education is usually the American opportunity credit, also known as the AOC. The AOC can be for as much as $2,500 per student. A portion of the AOC is referred to as being refundable. Up to $1,000 of the AOC may be refunded to you, even if there is no tax liability for it to offset.
The cost of books is included along with tuition and mandatory fees to calculate total costs for the AOC. The AOC is only available to undergraduate students and can be claimed for a maximum of four years per student. For undergraduates continuing their classes beyond four years, as well as graduate students, another credit is available.
Lifetime learning credit
The lifetime learning credit (LLC) is 20 percent of up to $10, 000 in costs, so the maximum credit is $2,000. There is no refundable component of the LLC, so it is useful only to the extent that it offsets tax otherwise payable. There is no limit on the number of years you can claim the LLC.
Unlike the AOC, the LLC may be claimed for the cost of a single class to improve job skills, even if the student is not pursuing a degree. Even though there is no limit on the number of students you can include for the LLC, $10,000 is the cost limitation for all students combined. If there are several students reported on your tax return, you might need to use an additional deduction to obtain the maximum tax advantage.
Tuition and fees deduction
Although there are differing tax benefits for the cost of education, each student is eligible for only one benefit each year. If your qualifying costs for the lifetime learning credit are near the LLC limit, you may claim the tuition and fees deduction for any students not already included on a tax credit.
Unlike a credit that offsets actual tax dollar for dollar, a deduction simply reduces the amount of income that is taxable. The tuition and fees deduction has been extended through 2016 and may be claimed for up to $4,000 in qualified expenses.
If not already included to claim another tax benefit, education expenses incurred to improve your own job skills may be deducted as an itemized deduction. If married, the same would apply to your spouse. Contact an accountant, such as those found at Alexander & Associates CPA, for more specific information about the additional requirements of claiming tax credits or deductions for the costs of education.Share