Tax season is upon us and for parents of college students, the tax credits offered for higher education could reduce your tax burden. While that’s certainly good news, it’s important to understand what is allowed and who can claim each credit or deduction.
If your student began college in the fall of 2017, these credits will be new to you. If your student attended college prior to 2017, there are some changes to the Education Tax Credit that might affect which credits you claim.
Here’s a quick Q&A to help you plan before filing your taxes in April.
Q: Are there any changes to the 2017 Education Tax Credit?
A: According to IRS Publication 970, Tax Benefits for Education, there are a few notable changes for 2017.
- Tuition and Fees Deduction—If you have claimed these credits in previous years, you may be surprised to see that the Tuition and Fees Deduction is no longer available. Congress failed to renew this deduction for 2017. The tuition and fees deduction was an adjustment to income that decreased your adjusted gross income without having to itemize.
- Educational Institution EIN—In order to claim any education tax credits, it is now required that you provide the EIN of the institution. You can obtain this from the college. Without it, you won’t be able to claim any deductions.
- Lifetime Learning Credit—For 2017, the amount of your lifetime learning credit is gradually reduced if your MAGI (modified adjusted gross income) is between $56,000 and $66,000 ($112,000 and $132,000 if you file a joint return). You can’t claim the credit if your MAGI is $66,000 or more ($132,000 or more if you file a joint return).
- Student loan interest—For 2017, the amount of your student loan interest deduction is gradually reduced if your MAGI is between $65,000 and $80,000 ($135,000 and $165,000 if you file a joint return). You can’t claim the deduction if your MAGI is $80,000 or more ($165,000 or more if you file a joint return).
- Education savings bonds—For 2017, the amount of education savings bond interest exclusion is gradually reduced if your MAGI is between $78,150 and $93,150 ($117,250 and $147,250 if you file a joint return). You can’t exclude any of the interest if your MAGI is $93,150 or more ($147,250 or more if you file a joint return).
Every student and family’s situation is different so we recommend consulting with a Certified Public Accountant or tax preparation professional if possible.
Q: Who is eligible to claim education credits and/or deductions?
A: The student must be eligible, and the institution, too, in order to claim an education tax credit. The student must be enrolled at least half-time and pay qualifying education expenses. The institution is any college offering higher education beyond high school: a college, university or vocational school. This includes most accredited public, nonprofit and for-profit institutions. If you aren’t sure if the school is eligible ask or see if the school is listed on the U.S. Federal Student Aid Code List.
Q: What is a 1098-T and where do I get it?
A: The 1098-T is a form provided to you and the IRS by the college that reports amounts paid for qualified tuition and related expenses. Most colleges are required to provide you with a 1098-T, but for the 2017 tax year some institutions are not required to provide it under certain circumstances. If you do not receive a 1098-T you can still claim an education tax credit. However, your student must meet all the criteria as mentioned above and you must provide proof of eligible tuition payments if the IRS requires copies of the documents.
Q: What education tax credits are available for parents?
A: For 2017, there are two education credits available to parents of college students: The American Opportunity Act and the Lifetime Learning Credit. Credits reduce your tax bill dollar for dollar. If you have more than one student in college, you can claim one credit, per student, per year.
The AOTC is the best tax break for parents of college students. You can get a federal tax credit for as much as $2,500 per year. You can claim this credit for a maximum of four years of undergraduate tuition per student. If you don’t owe taxes, you can get a check for up to $1,000 if you claim this credit. The credit is available for single taxpayers with a MAGI up to $90,000 a year and married families with incomes up to $180,000 with it phasing down at higher incomes.
The Lifetime Learning Credit will kick in after you have used your AOTC for the four years. You can a credit of up to $2,000 per year on tuition payments and can use it indefinitely as long has you have tuition payments. But, as mentioned earlier, there is a more restrictive income limit which is gradually reduced as your MAGI increases.
It’s also important for parents to only claim the AOTC if the student qualifies. If the IRS determines that you submitted a fraudulent deduction, you will be barred from claiming it in the future for two or up to 10 years depending on your conduct.
Q: What are the qualified expenses I can claim for an education tax credit?
A: You can claim tuition and required fees, books, supplies and equipment needed for a course of study. You cannot use room and board, transportation, insurance and medical expenses when determining your credit. If you have questions, you can read the Qualified Education Expense explanation from the IRS for more information. If you paid for second semester 2018 tuition in 2017, you can claim that on your 2017 income taxes.
In addition, you are allowed to claim a deduction for qualified education expenses if you paid with the proceeds of a loan. Figure the expenses based on the date the loan proceeds were paid to the college, not the year in which the loan is repaid.
Q: How do scholarships factor into education tax credits?
A: A scholarship or grant is tax free only if your student is a candidate for a degree and the money doesn’t exceed qualified education expenses. Any amount over these costs is taxable, but you can claim these overage funds as part of the education tax credits.
Q: Can I deduct student loan interest?
A: Student loan interest is the interest you paid on a student loan during the year. It includes both required and voluntary interest payments. This deduction can reduce the amount of your income subject to tax by up to $2,500. As stated earlier, this deduction does have income limits and may be either reduced or not allowed based on your MAGI.
Q: Can I claim a deduction if I use college savings plans to pay for tuition?
A: Qualified Tuition Programs (QTP) such as 529 savings and Coverdell Education savings accounts allow you to either prepay or contribute to an account to pay for a student’s post-secondary education. No tax is due on a distribution unless the amount distributed is greater than the student’s qualified education expenses. Even if you used a QTP to finance your student’s education, you may still be eligible to claim the AOTC or the Lifetime Learning Credit on the overage. Consult IRS Publication 970 for instructions on how to coordinate these distributions with the education credits.
Q: How should I prepare for 2018?
A: For 2018, there will be changes to the Education Tax Credits. The Tax Cuts and Jobs Act (TCJA) modifies and eliminates some of the benefits for people who are saving for college and people who are paying off their student loans. If you are interested in reviewing these changes, H&R Block discusses them in depth: Changes to Education with Tax Reform.
If you still have questions about your 2017 taxes, the IRS provides an informative Q&A along with an interactive app to help you determine eligibility for an education tax credit deduction: Am I Eligible to Claim an Education Credit?