The federal government offers two valuable tax credits for qualified expenses for higher education: 1) the AOTC, and 2) the LLC. Unfortunately, both credits phase out based on the taxpayer’s MAGI. The good news is that nondependent students may be able to claim the credits when their parents’ MAGI exceeds the applicable limit.

The AOTC

The AOTC generally is considered the more beneficial of the two education tax credits. It can be claimed for qualified education expenses (ie: tuition, mandatory fees, books and supplies) for an eligible student for the first four years of higher education.

The credit equals 100% of the first $2,000 of qualified expenses for each eligible student and 25% of the next $2,000 of qualified expenses paid for the student. The maximum annual credit is $2,500 per student.

Unlike the LLC, a portion of the AOTC is refundable. If the credit results in the individual owing no taxes, he or she can receive 40% of any remaining credit amount (up to $1,000).

To be eligible, the student must:

• Be pursuing a degree or other recognized education credential,
• Be enrolled at least half time for one academic period that begin during the tax year,
• Not have completed the first four years of higher education at the start of the tax year,
• Not have claimed the AOTC or the former Hope credit for more than four tax years, and
• Not have a felony drug conviction at the end of the year.

The full credit is available if the taxpayer’s MAGI is $80,000 or less ($160,000 or less for married couples who file jointly). The credit is reduced if MAGI is more than $80,000 but less than $90,000 (more than $160,000 and less than $180,000 for married couple who file jointly). The credit isn’t available if MAGI exceeds $90,000 ($180,000 for joint filers).

If applicable, the following is included in MAGI:

• Foreign earned income exclusion,
• Foreign housing exclusion,
• Foreign housing deduction, and
• Exclusion of income by residents of American Samoa or Puerto Rico.

Note: For most people, MAGI simply equals their adjusted gross income.

The LLC

The LLC applies to qualified tuition and related expenses paid for eligible students (excluding books, supplies and equipment). This credit isn’t limited to undergraduate courses; it’s also available for graduate and professional degree courses, including courses to acquire or improve job skills. Also there’s no limit on the number of years for which the LLC can be claimed. The credit amount is 20% of the first $10,000 of qualified expenses, up to $2,000 per tax return.

To be eligible, the student must:

• Be enrolled or taking courses at an eligible education institution,
• Be taking a higher education course or courses to get a degree or other recognized education credential or to obtain or improve job skills, and
• Be enrolled for at least one academic period that began during the tax year.

The same MAGI limits that apply for the AOTC apply to the LLC.

Additional Caveat

The IRS doesn’t allow taxpayers — whether the parents or the student — to “double dip” on the education credits. In other words, they can’t claim or deduct multiple higher education tax breaks based on the same student or same expenses. Double dippers could face penalties and partial bans from claiming the credits. Contact us to discuss whether this tax-saving strategy will work for your family situation.