As summertime begins, many families are grappling with saving for a student beginning or continuing college come the fall. College education, whether for a child, yourself, or a spouse is a major investment. Knowing if your college-age child is still a dependent, what scholarships are taxable, and which tax credits are available is confusing.
Here's some guidance:
There are two federal tax credits available to help individuals offset the costs of higher education for themselves or their dependents. They are the American Opportunity Credit and the Life Time Learning Credit.
No matter which of the two education credits you qualify for they both operate from the same principle.
1. Tax credits reduce your tax bill by the actual amount of the credit. For each student, only one of the credits can be claimed in a single tax year. For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs.
2. The tuition and fees deduction, on the other hand, is subtracted from your taxable income. Your tax will be lower, but not dollar-for-dollar like a credit. Choose to take either the credit or the deduction and consider which is more beneficial for you. Generally, the credits provide the greater benefit.
Source: IRS.Gov- Education tax benefits
The bottom line... it's important you seek assistance from a tax expert to figure out which option is best for you and your situation. Our tax advisors can help you with questions relating to:
Lifetime Learning Credit
American Opportunity Credit
Calculating credit amount
Requirements for claiming
We look forward to hearing from you!