I’ve always dreaded tax season, but when I had children in college there was one aspect of this unwelcome ritual that I actually looked forward to every year.
I loved claiming the American Opportunity Tax Credit, which allows qualified parents to knock up to $2,500 off their tax bill for each of their children in college.
I felt even better the one year that my husband Bruce and I got to cut what we owed to the IRS by $5,000 when we had both of our children in college at once. During all those other college-going years, our annual tax credit reduced our IRS bill by $2,500.
This is the first year that Bruce and I won’t be able to claim the credit after seven years in a row and we’re really going to miss it.
Tax credits, by the way, are vastly more valuable than tax deductions because they reduce what you owe on your taxes dollar for dollar. So if you owed the IRS $3,000 on your 2014 tax return and you claimed the maximum American Opportunity Tax Credit, your bill would drop to $500.
The American Opportunity Tax Credit, which Congress has threatened to kill off many times, will be the most generous federal education tax credit for most families. Plenty of parents have no idea that this education tax credit exists nor do they know about other higher-ed tax benefits.
An easy-to-understand resource exists, however, to get you up to speed on all these benefits. Edvisor Network explains these education tax benefits in plain English and how they can best be used, which I think is a first. Here is the main link to visit the site’s higher-ed tax benefit resource guide, which you can see in the screen shot below:
Learning About College Tax Credits
You have always been able to read about these higher-ed benefits on the IRS website or through IRS Publication 970, but when you finish you are likely to be scratching your head about which one to pick and the best way to use them. That’s why I particularly like the Edvisor Network’s tax benefit section entitled, Picking the Best Mix of Education Tax Credits and Deductions.
Mark Kantrowitz, one of the nation’s leading experts on financial aid, and David Levy, the former financial aid director of three colleges including California Institute of Technology, who both work at Edvisors Network, are the authors of this educational material. (Some of you might remember that Kantrowitz was the founder of FinAid.org, but he is now the publisher at Edvisor Network.)
The Best Tax Credit
As I’ve already mentioned, the best tax benefit for most parents will be the American Opportunity Tax Credit. If parents qualify, they can claim a maximum $2,500 tax credit for each child in college.
To capture the American Opportunity Tax Credit, taxpayers can claim 100% of the first $2,000 that they spend on qualified college expenses for a student and 25% on the next $2,000 spent. Tuition and fees and course materials such as textbooks, supplies and equipment are eligible expenses. Room and board do not count. Parents can use this credit for no more than four years of college.
To qualify, a family’s modified adjusted gross income must be under $90,000 for a parent filing as a single taxpayer or under $180,000 for married parents filing jointly. There is also a phase-out period.
No Double Dipping
What’s tricky about using the American Opportunity Tax Credit, as well as other tax credits and deductions, is that no double dipping is allowed. Parents can’t use the same educational expenses to qualify for more than one education tax benefit and that includes tax-free withdrawals from a 529 college account. (Those tax-free withdrawals are considered an educational benefit.) So when my husband and I claimed the American Opportunity Tax Credit, we had to make sure that we weren’t using the same expenses twice.
For instance, if you withdrew $4,000 from a 529 plan to help pay for college tuition, you couldn’t use that same expenditure to qualify for the American Opportunity Tax Credit.
When filing your taxes this year, make sure to see if you can capture the American Opportunity Tax Credit or one of the other higher-ed freebies from Uncle Sam. They represent a great way to defray the cost of college.