Now that your children are back in school, you might consider the available tax breaks for higher education expenses. Following extensions and modifications under the Protecting Americans from Tax Hikes (PATH) Act of 2015, there are three primary tax provisions that may benefit parents: the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC) and the tuition deduction.
The catch is that you may not be eligible for any or all of the three tax breaks. What’s more, no matter how many you qualify for, you can generally only claim just one on your tax return. Here is a brief overview.
1. AOTC: The enhanced version of the AOTC (American Opportunity Tax Credit), previously called the Hope Scholarship credit, was permanently adopted by the PATH Act. The maximum annual credit is $2,500. Key point: The AOTC may be claimed for every student in the family. For example, if you have two children attending college in 2016, the maximum credit is doubled to $5,000. Furthermore, the credit is now available for four years of college, having recently been raised from two years of study.
Unfortunately, however, the AOTC is phased out for many parents. The phaseout occurs between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers; $160,000 and $180,000 of MAGI for joint filers. Once you exceed the upper threshold, you cannot claim the AOTC.
2. LLC: The LLC (Lifetime Learning Credit) was already permanent before the PATH Act. But this maximum credit is $2,000, as opposed to the $2,500 AOTC. Unlike the AOTC, the LLC credit applies to each taxpayer. Thus, if you have two children in school this year, the maximum credit remains $2,000.
The LLC is subject to phaseout rules at even lower levels than the AOTC. The phaseout range for 2016 ranges from $55,000 to $65,000 of MAGI for single filers, and $111,000 to $131,000 for joint filers. Again, no credit is available above the upper thresholds. Although these limits are subject to inflation indexing, recent increases have been minimal.
3. Tuition deduction: Finally, you may be able to claim an above-the-line deduction for tuition and related fees. A $4,000 deduction is available for single filers with a MAGI up to $65,000, while a $2,000 deduction may be claimed for a MAGI between $65,000 and $80,000. For joint filers, the $4,000 deduction is available for a MAGI up to $130,000 and the $2,000 deduction for those with a MAGI between $130,000 and $160,000. Higher-income taxpayers cannot claim a deduction.
This deduction, which has expired and been extended numerous times, was again extended through 2016 by the PATH Act. Its future is uncertain.
Remember that you generally may claim one of the two credits—the AOTC or the LLC—or the tuition deduction, but not any combination of the three tax breaks.
Year-end tax planning: If your child’s next college semester begins in January 2017, you may pay the tuition for that semester in December and claim the appropriate credit or deduction on your 2016 return. Keep this in mind as the end of the year approaches.
Also, if you are interested, you should also check out our Saving for Education resource page.
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