tax credits

American Opportunity Credit Helps Pay for First Four Years of College

College Students May be Eligible for Tax Breaks According to Scarsdale CPA

The American Opportunity Tax Credit can help college students save big bucks!

Scarsdale CPA Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

More parents and students can use a federal education credit to offset part of the cost of college under the  American Opportunity Credit. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

  • Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
  • The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
  • Forty percent of the American Opportunity Credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax. See IRS Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, please contact us or see IRS Publication 970, Tax Benefits for Education.

EITC and Other Tax Credits: Are You Eligible?

Westchester CPA Tax Tips

Earned Income Tax Credit can put extra money in your pocket this tax season if you qualify.

Westchester tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

The Earned Income Tax Credit (EITC) is for working individuals who do not earn high incomes. Taxpayers who qualify and claim the credit could pay less or no federal tax, or even get a tax refund. However, the IRS estimates that 25% of those who qualify don’t claim the credit and advises taxpayers to consider claiming tax credits i.e., a dollar-for-dollar reduction of taxes owed for which they might be eligible.

Some of the credits taxpayers could be eligible to claim include:

Earned Income Tax Credit (EITC): A refundable credit for low-income working individuals and families. Income and family size determine the EITC amount. If the EITC exceeds the amount of taxes owed, those who claim and qualify for the credit receive a tax refund. See IRS Publication 596, Earned Income Credit (EIC) or use the EITC Assistant to see if you qualify.

Child Tax Credit: For people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child and it can be claimed in addition to the credit for child and dependent care expenses. See Pub. 972, Child Tax Credit.

Child and Dependent Care Credit: For expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. The amount of qualifying expenses is limited and the credit is a percentage of those expenses. See Pub. 503, Child and Dependent Care Expenses.

Adoption Credit: A tax credit of up to $13,170 can be taken for qualifying expenses paid to adopt an eligible child. See Pub. 968, Tax Benefits for Adoption.

Credit for the Elderly and Disabled: Available to individuals who are either age 65+ or under age 65 and retired on permanent and total disability, and who are citizens or residents. Income limitations apply. See Pub. 524, Credit for the Elderly or the Disabled.

Education Credits (Two Available): For those who pay higher education costs.  The American Opportunity Credit (formerly the Hope Credit) is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on a tax return.  The Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. A taxpayer cannot claim both credits for the same student in one year. See Publication 970, Tax Benefits for Education.

Retirement Savings Contribution Credit: A credit for a percentage of qualified retirement savings contributions, such as contributions to a traditional or Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be eligible, you must be at least age 18 at the end of the year and not a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. See chapter four in Publication 590, Individual Retirement Arrangements (IRAs).

In addition to those listed here, other credits are available to eligible taxpayers. Please contact Westchester CPA Paul Herman so we may asses your specific situation, and offer advice on the best way to claim your credits.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.