Higher education expenses are difficult to manage for many families. Not only are tuition fees extremely expensive, but there are many other costs associated with tertiary education.

In an effort to ease the burden on taxpayers, the IRS implemented the American Opportunity Credit and the Lifetime Learning Credit. Under these schemes, the tax credits are applied against the amount of taxes you would otherwise owe the IRS.

Qualification criteria for each of the credits include:

– You must pay the post-secondary tuition and fees for yourself, your spouse, or your dependent/s.

– The credit may be claimed by either the parent or the student (not both). Where the credit is being claimed in regards to a dependent, the dependent student is not permitted to claim the credit.

– The claimant may only utilize one of the tax credits in any particular year (not both).

– Each student is treated separately for the purposes of the credit.

So, for two dependent college students, the parents are entitled to claim either the American Opportunity Credit or the Lifetime Learning Credit for student A, as well as another claim of either credit for student B.

American Opportunity Credit

The American Opportunity Credit (“AOC”) replaces the previous Hope Credit and has been extended to operate in 2011 and 2012. The primary difference between the Hope Credit and the American Opportunity Credit is that families may potentially still receive a refund, even if they owe no or little taxes.

To be eligible, the student must be enrolled in an undergraduate degree or other recognized educational credential for at least half of the required full-time course load for at least one academic period in the year. Eligible institutions include colleges, universities, and other post-secondary educational institutions.

Students must also be within their first four years of tertiary education and must never have been convicted of a substance abuse felony.

Qualifying expenses under the American Opportunity Credit include tuition and fees, books, supplies, and equipment requirement for enrollment and studying of the recognized, approved course. Ineligible expenses include costs such as housing, meals, transportation, medical expenses, insurance, incidentals, and items which are not required under the degree or recognized qualification (i.e., non-credit courses and leisure pursuits or hobbies).

The amount of the credit is calculated as 100% of the first $2,000 of qualifying expenses, and 25% of the next $2,000, up to a maximum of $2,500 per student, with forty percent of the credit being refundable. This means that even if you owe zero taxes, you may receive up to $1,000 as a refund.

The Modified adjusted gross income (“MAGI”) is also taken into account when determining eligibility. The full American Opportunity Credit is typically available to sole taxpayers with an MAGI of less than $80,000, or married couples filing a joint return with an MAGI of less than $160,000.

Lifetime Learning Credit

The Lifetime Learning Credit (“LLC”) is similar to the American Opportunity Credit; however the maximum amount is $2,000 per eligible student, per year, and is not refundable. In other words, it is limited by the amount of tax you pay on your tax return. However, the requirements are extended to any form of post-secondary education, including those to acquire or improve skills for your employment. This credit is unfortunately available in 2011 only.

There is no limit to the number of years you may claim the LLC and there is no minimum workload requirement per academic period. The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

The maximum credit is calculated as 20% of eligible expenditure, up to a maximum credit of $2,000 (i.e., expenditure of $10,000). Eligible expenses which include tuition and fees, course-related books, supplies, and equipment, as well as costs that are not specifically part of the degree or credential. E.g., Costs incurred by employees or job-seekers who enroll in post-secondary courses to increase or fine-tune their job skills and employment prospects.

College and other post-secondary education is an expensive, but often necessary and empowering journey. By being aware of the tax credits you are potentially eligible to claim, you could reduce the financial pressures that accompany this rewarding segment of your life.

Andrew Brody, CPA specializes in providing accounting and tax services to small business owners and professional practices in Miami, FL. For more information, go here: http://www.cpaofmiami.com

Andrew Brody, CPA specializes in providing accounting and tax services to small business owners and professional practices in Miami, FL. For more information, go here: http://www.cpaofmiami.com

Author Bio: Andrew Brody, CPA specializes in providing accounting and tax services to small business owners and professional practices in Miami, FL. For more information, go here: http://www.cpaofmiami.com

Category: Finances
Keywords: CPA advice, accounting and tax advice, CPA business services