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Back to School Tax Benefits

The IRS just sent out a nice news wire over its enews service entitled “Back-to-School Reminder for Parents and Students. ”   It urges parents and students to see if they qualify for either of two college tax credits or other education-related tax benefits.

The tax benefits available to students are summarized in IR-2015-102.  Two of the primary credits are the American Opportunity Tax Credit and the Lifetime Learning Credit.

Though a taxpayer often qualifies for both of these credits, only one can be claimed per student in a given year.  To claim these credits, the taxpayer must file Form 1040 or 1040A and complete 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 (although 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.  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 over $80,000 and couples with modified adjusted gross incomes over          $160,000.

The Lifetime Learning Credit (LLC) 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 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.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

Article appears as originally published in the Ohio Jewish Chronicle, September 3, 2015.

Jackie Jacobs is the Chief Executive Office of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.

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