A Quick Lesson in Education Tax Credits

If you’re one of those folks trying to balance a job while getting a college education, filing your federal income tax forms probably hasn’t been a huge priority. But there is still time to file and there are several reasons students should file—even if they owe no income tax.

As part of the federal stimulus bill enacted in 2009, Congress passed the American Opportunity Tax Credit (AOTC) for the 2009 and 2010 tax years. The purpose of the AOTC is to make higher education more affordable for students and low-income families who otherwise may not be able to attend college.

This legislation expanded the Hope Scholarship Credit, which only applied to the first two years of college. The AOTC, however, is available for students pursuing an undergraduate degree who are in their first four years of college. The earning limits have also been raised. Filers may be eligible for AOTC if they:

  • had an adjusted gross income in 2010 less than $80,000 for an individual;
  • had an adjusted gross income in 2010 less than $160,000 if married;
  • paid for  “qualified tuition and related expenses,” whether for themselves, their spouse or their dependents, at an “eligible educational institution”; and
  • are immigrants who are resident aliens for tax purposes.

Qualified expenses for the AOTC include tuition and course-related materials. These materials include books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Expenses such as room and board, transportation, medical bills, and child care do not qualify for the AOTC. Tuition is the amount paid after tax-free contributions have been subtracted, such as scholarships, Pell Grants, veteran’s assistance, fellowships, and employee assistance.

Eligible educational institutions include colleges, universities, vocational schools, and accredited schools eligible to participate in the Student Aid program of the U.S. Department of Education. Visit the U.S. Department of Education website if you are not sure whether your school qualifies.

The AOTC is worth up to $2,500 of the cost of tuition and expenses paid during 2010 – that’s an increase of $700 from the Hope Credit’s maximum. In addition, AOTC provides a refundable credit worth up to $1,000, meaning you may qualify to receive up to $1,000 even if you owe no taxes. If you do owe taxes, the credit is used to reduce your tax liability.

For students not pursuing a degree, the Lifetime Learning Credit is still available at any point in their post-secondary education. Students who claim an education credit may also qualify to claim the Earned Income Tax Credit and Child Tax Credit, if they qualify. To claim your AOTC or Lifetime Learning Credit you must use IRS form 8863. This form must be attached to your 1040 or 1040A form. For more information about the AOTC, visit http://www.irs.gov/newsroom/article/0,,id=211309,00.html.

Kwaku Sraha is NMVC’s Finance Manager