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Friday August 28, 2015

Washington News

Washington Hotline

Back to School Tax Benefits

As students return to colleges and universities this month, the IRS summarized the tax benefits available to students in IR-2015-102. Two of the primary credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

A taxpayer may claim one or the other credit for a particular student. You must file IRS Form 140 or 140A and also Form 8863, Education Credits. The student must attend an eligible college, university or vocational school.

A college or university must give each student IRS Form 1098-T by January 31 each year (however, in 2016 the due date is February 1 because the previous day is a Sunday). A taxpayer will use Form 1098-T and refer to the instructions for Form 8863 to calculate the credit amount. Upper-income taxpayers may have limited benefits from these education credits.

The American Opportunity Tax Credit is a maximum of $2,500 per student and there are several requirements.

1. Maximum Duration – The credit may be claimed for up to four tax years per student.

2. Student – A student may not have completed four years of post-secondary education prior to 2015.

3. Qualified – The credit is available for payments of tuition and fees. Room and board amounts are not covered.

4. Amount – The credit is 100% of the first $2,000 in qualified expenditures and 25% of the next $2,000. An expenditure of $4,000 may produce qualification for the full $2,500 credit.

5. Refundable – Up to 40% of the credit is refundable. If a person pays no federal income tax, it is still possible to receive a $1,000 refund.

6. Limits for Upper-income Taxpayers – The AOTC is phased out for single persons with modified adjusted gross income (MAGI) over $80,000 and couples with MAGI over $160,000.

The Lifetime Learning Credit is $2,000 per tax return (not per student). It applies to both graduate and undergraduate education. None of the LLC is refundable.

1. Qualified – The LLC is available for payment of tuition and fees.

2. Amount – The LLC equals 20% of qualified expenditures. A tuition payment of $10,000 times 20% produces the maximum $2,000 credit.

3. Phaseout – Individuals with modified adjusted gross income (MAGI) over $55,000 for single persons or $110,000 for married couples will be subjected to the phaseout rule.

There also are other helpful educational benefit options. Scholarships and grants are generally tax-free to the extent that they cover tuition and books. Scholarships for room and board are taxable.

If a student has loans, there is an interest deduction of up to $2,500 per year. Finally, parents may choose to fund a Sec. 529 plan. A parent may give up to five annual gift exclusion amounts in one year. With the current $14,000 annual gift exclusion, each donor may transfer up to $70,000 to a Sec. 529 plan. The plan permits tax-free growth and tax-free distribution to a student for qualified education expenses.

Published August 21, 2015

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