Graduate Degree on Knowledge of Education Credits

Surprise!  Surprise!  (Famous quote from Gomer Pile) When it comes to understanding the ins and outs of education tax credits, most folks get it all wrong

American Opportunity Tax Credit (AOTC) is a maximum annual $2,500 credit to be used for up to four years of study for every student in the family.  (That includes mom and dad.)  That is potentially $10,000 spread out over at least the first 4 years.  Not bad!  To qualify, a student must be enrolled in pursuing a degree in a post-secondary educational institution eligible to participate in a US Dept of Education student aid program.  That student must be at least taking ½ of a normal academic period (what qualifies as some school defined portion of a full year of education in that school).  Oh!  The student can NOT have a felony drug conviction at the end of the school year.  (Don’t use drugs!)  There is no rule about taking this consecutively.  A student could take classes to qualify for 1 year, drop out and go work as a forest service smoke jumper (or whatever) for a couple of years, then go back to school and qualify for the 2^nd of 4 years of this credit.  There is an income phase out.  If a single taxpayer earns at least $80,000 in modified adjusted gross income (MAGI) it starts to phase out.  By $90,000, credit is gone.  $160,000 to $180,000 for joint filers.  Up to $1,000 of the AOTC credit is a “refundable credit” (you get it no matter if you owe any tax or not).

Life-Time Learning Credit (LLC) is a maximum annual $2,000 credit per student.  There is no limit on the number of years you can claim this credit.  Once again, every member of your household is eligible.  There’s a catch though.  This credit is a maximum per tax return filed each year.  If there are two or more “students” (say mom and dependent daughter), still only claim $2,000, not $4,000.  Bummer!  You can take this credit instead of the AOTC, but why would you?  The AOTC is a larger amount and available for every member of your household.  This credit comes in handy once you have exhausted the maximum 4 years of the AOTC.  (Kind of a better than nothing situation.)  Once again, to claim the credit, the student must be enrolled in the same type of educational organization as the AOTC, must be enrolled in at least ½ of a normal academic period.  Just like the AOTC, there is a phase out on this credit.  If fact, the same numbers.  ($80,000/$90,000 or $160,000/$180,000.)  None of the LLC credit is refundable.  Thus, you must have some tax to offset it with.

Here’s the planning tip.  A student may be planning on getting more than a 4-year education.  (example: Lawyers 6 years; Doctors 8 years) The strategy would be to take the first 4 AOTC credits ($10,000 total) then $2,000 for each additional year of education.  For a Doctor that would be a total of $18,000 in education credits.

Here’s the catch.  A student who is a dependent of a parent, and that parent earns more than the MAGI top phase-out, there is no credit.  It may be worth having the student have some earned income and file their own tax return, NOT as a dependent on their parent’s return.  The student would then get at least $1,000 refundable portion of the AOTC credit for the first 4 years.  Then, hopefully, the student is earning more income during the final years of education (but not enough to trigger the phase out), to use the LLC to offset their actual income tax.

Have you heard? Prov 9:9 says, “Instruct a wise person, and he will be still wiser.  Teach a righteous person, and he will increase in learning.”

 Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.