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Tax Credits Students Can't Afford To Ignore

Lois Basil

When it comes to education, the past six years have been expensive in the Basil household. Chicago resident Lois Basil, and her husband, Greg, have put one daughter through college, and the other is currently pursuing her bachelor's degree. During that time, Lois was also pursing her Certified Financial Planner (CFP™) credential.

Fortunately, in 2009, the Basil's certified public accountant (CPA) told them about the American Opportunity Tax Credit and the Lifetime Learning Credit, two student tax credits that can help some Americans significantly offset the cost of higher education. As it turned out, both daughters qualified for the American Opportunity Credit and Lois benefited from the Lifetime Learning Credit.

"I actually was surprised. I wasn't even aware of it," Basil says. "I think most parents are surprised that they qualify for it, and it's a really nice surprise at tax time."

Now that she's a CFP™, Lois, who is owner of Basil Financial Group, makes sure that her clients know about the tax benefits to education. "It lowers the cost of going to college. It's an acknowledgement that education is good for all of us. It's a tax benefit that really helps," she says.

"[Education] is a really good investment. I would encourage people to take advantage of higher education."

  - Lois Basil

The American Opportunity Tax Credit allows for a maximum annual benefit of $2,500 per student for up to four years of qualified education expenses, and the Lifetime Learning Credit allows for a maximum annual benefit of $2,000 for qualified expenses. More information on each credit, including how to tell if you qualify, is available below.

Enrollment is rising — but so is cost

Across the country, more and more students can benefit from these credits, as college enrollment is rising. According to U.S. News & World Report, over a roughly 30-year period, from 1980 until 2012, college enrollment among 18s to 24-year-olds has exploded from 26 percent to 41 percent. In 2014, 20.1 million students were expected to attend college, according to the National Center for Education Statistics (NCES).

That's an increase of 5.7 million since the fall of 2000, and analysts say that number will continue to rise. According to the NCES report "Projection of Education Statistics to 2022," total enrollment in post-secondary, degree-granting institutions is expected to rise by 14 percent through 2022.

But that education doesn't come cheap. During the 2012-13 school year, according to NCES, students paid, on average, $15,022 for tuition, fees, room and board at public universities; $39,173 at private nonprofit colleges; and $23,158 at for-profit institutions.

Still, according to a study by the Federal Reserve Bank of New York, the benefits of a degree outweigh the costs. That analysis found that graduates across every major earned a return of at least 9 percent, with majors in engineering, math and computers earning a return of up to 21 percent.

For example, in 2012, the median annual earnings of U.S. adults aged 25 to 34 with a bachelor's degree measured at $46,900, NCES reports, while their counterparts with a high school diploma earned $30,000 and those with an associate degree earned $35,700 on average. Those without a high school diploma earned about $22,900.

How other tax deductions help families pay

As someone who continues to pay for — and value — education in her family, Lois Basil says that tax credits are a huge help. Yet, many of her clients are as unaware of the credits as she initially was. When asked if most parents know that these even exist, she says, "No. Not unless they have their taxes professionally prepared."

Basil says that beyond the student tax credits, there are a number tax incentives for students. School tuition and fees can also be tax deductible, for starters. "It's not as good as a tax credit," she adds. "You would do those after you have exhausted your other two options [the American Opportunity Tax Credit and the Lifetime Learning Credit]."

She adds that student loan interest deductions are also something to consider. "Student loan interest is deductible, but there are caps on how much you earn," she says. "It can be really helpful in your early years when you're not earning a lot. But as your earnings grow, the ability to write off student interest goes away."

Lois encourages all degree seekers to do some research and find out if they qualify for the credits. Education, she says, is something worth paying for. "It's a really good investment. I would encourage people to take advantage of higher education," she says. "It's good debt, within limits."

Here's a look at the higher education credits available, as outlined by the Internal Revenue Service's form 970.

American Opportunity Credit

Maximum credit: $2,500 available for qualified education expenses per tax year for eligible students.

Limit on modified adjusted gross income: For full credit: $160,000 if married filing jointly; $80,000 if single, head of household, or qualifying widower. You can earn up to $180,000 jointly; $90,000 single and still earn partial credit.

Time limit: You can claim it for up to four years.

Course requirements: Student must be enrolled at least half time for at least one academic period that tax year; he or she must be pursuing a degree or credential.

Qualified expenses: Tuition, required enrollment fees, course materials needed for study.

Can you claim the credit?

  • Did you pay qualified education expenses of higher education?
  • Did you pay the education expenses for an eligible student?
  • Is the eligible student you, your spouse or a dependent for whom you claim an exemption on your tax return?

Lifetime Learning Credit

Maximum credit: Up to $2,000 per return

Limit on modified adjusted gross income: For full credit: $104,000 if married filing jointly; $52,000 if single, head of household, or qualifying widower; if you're making less than $124,000 together or less than $62,000 single you can qualify for partial credit.

Time limit: None. This credit is available for all years of pursuing post-secondary education or courses to improve job/skills.

Course requirements: It does not need to apply to a degree or recognized education credential.

Qualified expenses: Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies and equipment).

Can you claim the credit?

  • Did you pay qualified education expenses of higher education?]
  • Did you pay the education expenses of an eligible student?
  • Is the eligible student you, your spouse or a dependent for whom you can claim an exemption on your tax return?

For more information on taxes and education, visit the Internal Revenue Service website, or check out these related articles:
5 sweet tax breaks for students
The 529 account: Get a tax break while saving for college

Sources:
1. "Do the Benefits of College Still Outweigh the Costs?" Jaison R. Abel and Richard Deitz, Current Issues in Economics and Finance, Federal Reserve Bank of New York, June 2014, viewed Jan. 23, 2015, http://www.newyorkfed.org/research/current_issues/ci20-3.html
2. Lois Basil, Certified Financial Planner, Basil Financial Group, Chicago, Interviewed by the author on Jan. 20, 2015
3. "Is the College Admissions Bubble About to Burst?" Lindsey Cook, U.S. News & World Report, Sept. 22, 2014, viewed Jan. 23, 2015, http://www.usnews.com/news/blogs/data-mine/2014/09/22/is-the-college-admissions-bubble-about-to-burst
4. American Opportunity Tax Credit, Internal Revenue Service, viewed Jan. 23, 2015, http://www.irs.gov/Individuals/AOTC
5. Lifetime Learning Credit, Internal Revenue Service, viewed Jan. 23, 2015, http://www.irs.gov/Individuals/LLC
6. "Tax Benefits for Education," IRS form 970, Internal Revenue Service, viewed Jan. 23, 2015, http://www.irs.gov/pub/irs-pdf/p970.pdf
7. Fast Facts: Back to School Statistics for 2014, National Center for Education Statistics, viewed Jan. 23, 2015, http://nces.ed.gov/fastfacts/display.asp?id=372
8. "Projection of Education Statistics to 2022," National Center for Education Statistics, February 2014, http://nces.ed.gov/pubs2014/2014051.pdf