Make the Most of Tax Breaks for College Expenses
Kim Lankford answers more questions about the American Opportunity Credit and other deductions for postsecondary education.
I’ve received dozens of follow-up questions since I wrote about the American Opportunity Credit in my column Get a Bigger Tax Break for College Expenses. Here are some more answers.
Does graduate school count toward the American Opportunity Credit?
No. The American Opportunity Credit applies only to the first four years of postsecondary education, so graduate school doesn’t count. But grad students can qualify for the Lifetime Learning Credit, which still exists.
The Lifetime Learning Credit, which can lower your tax bill by up to $2,000, is available for all years of postsecondary education or for courses you take to acquire or improve job skills. Unlike with the American Opportunity Credit, you don’t need to be pursuing a degree to qualify and you don’t have to be enrolled at least half-time during the academic period. But the classes must be taken at an eligible educational institution, which includes any college, university, vocational school or other postsecondary educational institution that’s eligible to participate in the U.S. Department of Education’s student-aid program. (Many foreign schools are also part of the agency’s program.)
There is no limit on the number of years a Lifetime Learning Credit can be claimed for each student. However, you cannot claim the credit in the same year that you claim the American Opportunity Credit for the same student.
The credit is calculated as 20% of the first $10,000 of qualified education expenses, which include tuition, student-activity fees, books and required supplies.
You can take the Lifetime Learning Credit only if your modified adjusted gross income is less than $60,000 if you’re single or $120,000 if you’re married filing jointly. The maximum credit starts to phase out if you’re single and earn more than $50,000 or married and earn more than $100,000. Those are much lower income limits than for the American Opportunity Credit, which is phased out for singles with incomes between $80,000 and $90,000 and for couples with incomes between $160,000 and $180,000.
You mentioned in your earlier article that the American Opportunity Credit counts for only the first four years of college. Is that four calendar years or four academic years? I go to college part-time and have been attending college for more than four calendar years, but I have not yet completed four academic years -- the college considers me to be a senior. Can I qualify for the American Opportunity Credit?
Yes, you probably can claim the American Opportunity Credit. A student’s eligibility is based on the academic year the college considers him or her to be in, says H.R. Rubinsky, senior tax analyst with the Tax & Accounting business of Thomson Reuters. So if the college considers you to be a senior, then you should be able to qualify for the American Opportunity Credit.
You can’t, however, claim the Hope Credit or American Opportunity Credit for more than a total of four years. To qualify for the credit, you must also be carrying at least one-half the normal full-time work load for the program you’re pursuing. If you don’t qualify for the American Opportunity Credit, you may still be able to take the Lifetime Learning Credit.
What if you paid for tuition with a loan. Can you still qualify?
Yes, you can. College costs paid with the proceeds of a loan are generally eligible for the American Opportunity Credit or Lifetime Learning Credit. The expenses count for the credit in the year that they are paid by the loan, not in the year that you pay back the loan.
What if you spend less than $4,000 on tuition? Can you still apply for the American Opportunity Credit?
Yes. Keep in mind that the American Opportunity Credit now covers tuition, fees and course materials, such as books. And you may qualify for a partial credit even if you don’t spend $4,000 in eligible expenses for the year. The actual calculation for the credit is 100% of the first $2,000 you pay for eligible expenses plus 25% of the next $2,000 of eligible expenses.
Can I pay all of my tuition from a 529 savings account and still qualify for the American Opportunity Credit?
You can’t double dip on tax breaks, so you’ll need to pay at least $4,000 of your eligible expenses from an account other than a 529 to qualify for the maximum American Opportunity Credit of $2,500. If you were planning on withdrawing money from various types of accounts for college costs, consider spreading your 529 distributions over several years so that you can still take the maximum American Opportunity Credit, if you qualify.
My daughter is in her third year of college and has a part-time job as a waitress. Would we (her parents) qualify for the credit, or would she take it herself?
It all depends on whether you claim her as a dependent on your tax return. “If a student is claimed as a dependent on another person’s tax return, only the person who claims the student as a dependent can claim the American Opportunity Credit,” says Rubinsky. “If the student isn’t claimed as a dependent, only the student can claim the credit.” See Tax Rules for Claiming Dependents and 12 Tricky Tax Dependent Dilemmas for details.
Even if your daughter pays some of the college bills, the money can still qualify for your American Opportunity Credit if you claim her as a dependent on your tax return. “For any year for which a student is claimed as a dependent, qualified tuition and related expenses paid by the student are treated as paid by the person claiming the student as a dependent,” says Rubinsky.
See IRS Publication 970, Tax Benefits for Education for more information about the tax breaks for college.