- ShindelRock - https://www.shindelrock.com -

Maximizing higher education tax credits

[1]There are two education credits available to college students (or parents of students) on their personal income tax returns.

American Opportunities Credit (AOTC)

Lifetime Learning Credit

When determining the amount of the credit, college expenses are put into 2 categories: (1) qualified and (2) non-qualified.  Only qualified expenses will count for purposes of calculating the credit.

Tax Planning Strategy

If the scholarship or grant allows, it may be beneficial for taxpayers to use scholarship funds to pay for non-qualified expenses and/or include portions of the scholarship as taxable income, especially given the new increased standard deduction amounts. This would result in NO reduction to qualified education expenses, thereby maximizing the potential for education tax credits.

Important things to consider are taxpayer’s filing status, other income, other credits, dependent status, phaseout limits, and which credits the taxpayer is eligible for. It is important to understand the terms of the scholarship as well. Some of the scholarships may not be eligible to cover non-qualified expenses.

For more information, read the full article [2] from the Journal of Accountancy.