Education Tax Credits

September brings the start of a new college term and again for 2015, the good news for education is that the two federal tax credits for college education expenses remain in place and available to us.

The American Opportunity Tax Credit (AOTC) is available for a student during their first four years of college. It is an annual tax credit which can be as high as $2,500 per year per student. The credit is available to anyone in your family during their first four years of college. A portion of this credit may be “refundable” which means that even though your tax liability may be zero, a refund check may still be available.

The second tax credit is the lifetime learning credit. This is also an annual credit which can be as high as $2,000 per year for the family. The beauty of this credit, as the name “lifetime” implies, it can be taken anytime you have qualifying college expenses during your lifetime. This credit will take over for grad school and doctoral studies after the basic 4 years of college have been completed.

Basically, both of the credits apply to the cost of tuition and in certain cases “course materials”. Housing, health fees, and transportation do not count. Scholarships and grants reduce the expenses that are eligible for the education tax credits. So you only count your out of pocket expenses. You must attend a qualified educational institution which is any post-secondary education institution eligible to participate in a student aid program administered by the Department of Education. This includes technical and vocational schools.

Both of these credits apply for expenses for you, your spouse, and your dependent. So no, you don’t have to be a 20 year old college student. You can be an 87 year old going back to college to take a course in whatever has your interest. For higher income families, there are times when a parent will be wise to let the child take the credit. If the government is willing to rebate a portion of the cost to take a college, technical, or vocational course, why not take advantage of it?

Most of the time, the college will give you a Form 1098-T regarding the information pertaining to the education credits. Starting with the 2016 tax returns, the college will be required to give you a Form 1098-T and you will be required to attach it to your tax return. The requirement to attach Form 1098-T to your tax return is a recent change added by the Trade Preference Extension Act of 2015.