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Higher education: lower tax bills?

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Starting your freshman year at college? Taking a single class at a university? Pursuing a certificate program? You may be able to lower your tax bill. Here are some tips for doing that:

Know Your Credits: There are two education credits available.

American Opportunity Credit:This is the larger credit, worth up to $2,500 per eligible student, plus 40 percent of the credit may be refundable. It is available for only four years per eligible student. The student must be pursuing a degree or credential and enrolled on at least a half time basis. Only students who have not completed four years of post-secondary education are eligible. It has a broader definition of qualified expenses which includes books and necessary supplies. The student may not have had a felony drug conviction.

Lifetime Learning Credit:This is worth up to $2,000 per return. Students don't need to be attending full time or pursuing a degree. It's available for an unlimited number of years. Only tuition and fee payments made to the institution are eligible expenses.

Both credits are allowed only for payments made to eligible institutions.Eligible institutions are any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Labor.Bothhave income limits varying by filing status; the American Opportunity Credit has higher limits than the Lifetime Learning Credit.Neitheris available to those who choose the filing status Married Filing Separate.Neitherallows a credit for expenses paid for by tax-free assistance. Tax-free assistance includes scholarships, grants, employer provided assistance and veteran's education assistance.

Know if you are a dependent, especially if you are under age 24. If you qualify to be someone's dependent, in most cases you may not claim an education credit; the person who claims your dependency does.

Timing is Important.On your 2014 return, you can get education credits for classes which begin in 2014 or up to three months into 2015. If you are beginning a program in early 2015, paying in 2014 may allow a tax credit for 2014. On the other hand, especially if you're already maxing out education credits this year, holding back on payment until 2015 can give you something to look forward to on your 2015 tax return.

Keep your records:Form 1098-T, issued by the institution, can list either amounts billed or paid. In addition, it notes graduate and or 'at least half-time' status.To document when payment was made, keep your student account bill. You should also keep receipts for any books or necessary supplies.

(There was a third option for higher education expenses, the Tuition Deduction. That deduction expired Dec. 31, 2013; however, it may return. It is particularly useful to higher income taxpayers not eligible for the American Opportunity Credit. )

Education credits were listed as 'often overlooked' in the October IRS Newswire; if you're pursuing a higher education be sure not to miss these credits.

Last modified on Tuesday, 07 October 2014 22:24

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