Paying for college expenses in 2016 may provide some tax savings on your federal tax return, even if the educational institution is outside of the U.S. Savings come in the form of tax credits, which apply to the final amount of tax you owe (the American Opportunity Tax Credit and the Lifetime Learning Credit) or a deduction which reduces the amount income on which you pay tax.
Here are a few things you should know about education credits and deductions:
- American Opportunity Tax Credit ‒ The AOTC is worth up to $2,500 per year for an eligible student. This credit is available for the first four years of higher education. Forty percent of the AOTC is refundable. That means, if you’re eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any tax.
- Lifetime Learning Credit ‒ The LLC is worth up to $2,000 per tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.
- Qualified expenses ‒ Only certain expenses for the credit amount. Qualified expenses include tuition, fees and other related expenses for eligible educational institution. Most accredited public, nonprofit, and privately-owned for profits postsecondary institutions are eligible. Ask the school if you’re not sure whether it is an eligible institution. Or, check the U.S. Department of Education’s Accreditation database.
- Income and other limits ‒ The education credits are subject to income limitations and may be reduced, or eliminated, based on your income. Additionally, the tax credits are available for you, your spouse, or a dependent you list on your tax return. If you’re eligible to claim both the AOTC and the LLC, you must choose only one, not both.
- Tuition and fees deduction – If you don’t qualify for the AOTC or LLC, another option is to claim a deduction for the qualified expenses for higher education. The deduction can reduce the amount of your income subject to tax by up to $4,000, and you may claim the deduction if you don’t itemize deductions. You may not claim both the deduction and a credit, and you may not claim the deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent.
- Form 1098-T ‒ In most cases, you will receive Form 1098-T, Tuition Statement, from your school by February 1. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be either: (1) the amount you paid for qualified tuition and related expenses, or (2) the amount that your school billed for qualified tuition and related expenses; therefore, the amounts shown on the form may be different than the amounts you actually paid.
To see if you’re eligible to claim education credits, use the Interactive Tax Assistant tool. The IRS also has more information about tax benefits for education, including the deductibility of student loan interest and deductions for work-related education. Please contact your Salmon Sims Thomas tax advisor if you have questions.