Now that your loved one is off to school, it’s time to begin paying the tuition and other related expenses. We have a number of tax-advantaged strategies you can consider to help with the high cost of college.
A couple tuition tax credits are available for those paying college tuition and fees.
You can take an American Opportunity Tax Credit (AOTC) of up to $2,500 per student for the first four years of college—a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school—a 20% credit for up to $10,000 in tuition and fees.
The AOTC is 40% refundable. That means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.
Both credits are phased out for higher-income taxpayers. The AOTC is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The phase-out range for the Lifetime Learning credit is adjusted annually for inflation. For 2022, the Lifetime Learning credit is phased out for marrieds filing jointly with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000.
Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an AOTC or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.
Please contact your tax advisor today to learn more.
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