This past week, I came to talk to a group of high school students with disabilities about Social Security, Medicaid,and Medicare Work Incentives and how the students’work income might affect their eligibility for benefits or how much of a cash benefit they are able to receive. The students were animated and attentive and asked a lot of questions. Kudos to Elmwood Park (Illinois) High School, because all of the students were having or expected to have real work-related experiences through school, and the school even helps the students to file their tax returns. Kudos also to the Progress Center for Independent Living (One of Illinois' “Centers for Independent Living” or “CILs”) located in Forest Park, whose youth outreach coordinator arranged for the talk. As we looked at how a person receiving disability benefits is almost always better off financially when s/he works, one of the students said that he wanted to earn and save money to pay for college. More and more students with disabilities are attending or expect to attend post-secondary education. This makes them and their families potentially eligible for various tax deductions and credits.
These deductions and credits are generally available for eligible expenses, incurred by eligible students attending eligible institutions. An eligible educational institution is a post-secondary school that is eligible to participate in a student aid program, funded by the U.S. Department of Education. It includes most public, non-profit, and privately owned schools of higher education. Qualified education expenses are amounts paid for tuition, fees, and other related expenses for an eligible student during the tax year for a period of study that begins either during the tax year or during the first three months of the next tax year. An eligible student includes the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents. Expenses may be paid by cash, check, credit/debit card or paid with borrowed funds. Expenses covered by scholarships, grants, or any kind of non-taxable award are not eligible.
American Opportunity Tax Credit (AOC) is available to students in their first four years of post-secondary undergraduate higher education. The student must be enrolled at least half-time and be pursuing a degree or other recognized education credential. Students with felony drug conviction at the end of the tax year are not eligible. The AOC is the only one among the education credits that includes books, supplies and equipment as eligible expenses. The taxpayer can deduct 100% of the first $2,000 of eligible expenses, and 25% of the next $2,000 for a maximum credit of $2,500 per eligible student. Once the credit has reduced tax liability to $0, 40% of the remaining credit is refundable up to $1,000. The full amount of calculated AOC is available to filers with a modified adjusted gross income (MAGI) of less than $160,000 if married filing jointly or less than $80,000 for all other filing statuses. A reduced amount of the credit is available to filers with MAGI between $160,000 and $180,000 (MFJ) or $80,000 to $90,000 for all other statuses. Finally, the credit is not available to those with MAGI above $180,000 (MFJ) or $90,000 (all others). Note that the credit is not available to those of any income level, who are married but filing separately. The AOC can be claimed for a maximum of four years for the same student.
The Lifetime Learning Credit (LLC) is available to students, who are taking courses at an eligible educational institution either to obtain a degree or to obtain or improve their employment skills. The student must be enrolled for at least one academic period—semester, trimester or quarter—that began during the tax year. The maximum LLC deduction is 20% of the first $10,000 of eligible expenses or $2,000 per return, regardless of the number of eligible students. No portion of the LLC is refundable. If it takes only a portion of the credit to reduce your tax liability to $0, you forfeit the remainder. LLC eligible expenses do not include books, supplies or equipment. The LLC is available for an unlimited number of years, as long as the taxpayer has eligible expenses. However, it does phase out for those with income higher than $116,000 (MFJ) or $58,000 (all other statuses) and is not available at all to those with incomes above $136,000 (MFJ) or $68,000 (all others). Similar to the AOC, this credit is not available at all to filers who are married but filing separately. You can use this link to figure out which education credit you may be able to claim.
A credit, such as the AOC or the LLC, reduces your tax obligation dollar for dollar and may even be refundable. A deduction, on the other hand, only reduces the income to which the tax rate is applied to calculate your tax obligation. In this respect, a credit is more valuable than a deduction. However, if you are unable to use either of the above two credits, you may still be able to reduce your taxable income by up to $4,000 for filers with a MAGI below $130,000 (MFJ) or $65,000 (all others). You may be able deduct up to $2,000 for filers with a MAGI below $160,000 (MFJ) or $80,000 all others. The maximum deduction is per return, not per student. Expenses must be incurred for an academic period that began in the tax year or within the first three months of the following year. You cannot claim both an education credit (AOC or LLC) as well as a tuition and fees deduction for the same student in the same tax year. However, you can claim the federal tuition and fees deduction for a student that you also claim for the purposes of a state-only education credit.
There is also a deduction for interest paid on student loans. Note that a parent can claim the deduction for interest paid by a student,claimed as a tax dependent. However, a dependent student may not claim the interest paid by a parent. The loan on which the interest has been paid must have been taken out solely to cover qualified education expenses at an eligible education institution for an eligible student. The interest must be paid or incurred with a reasonable amount of time before or after you took out the loan. The student incurring the expenses must have been enrolled at least half time. The loan-origination fee, capitalized interest, and interest on a line of credit or credit card may also qualify for the deduction if the line of credit or credit card was used solely to pay qualified education expenses. You cannot claim this deduction if you are married but filing separately. You cannot deduct interest during a period when you were not legally obligated to pay it; for example, because payment had been deferred. The maximum deduction is $2,500 per return. The deduction phases out for those with MAGI between $140,00 and $170,000 (MFJ) or $70,000 or $85,000 (all others). If you are the person who took out the loan, you may claim the interest deduction even if someone else helps you pay the interest.
Two days after I gave the talk, the son of the office manager came into the H&R Block office where I prepare taxes on a seasonal basis. He is on the autism spectrum, has a talent for art and just received and art scholarship to a local community college. His mother, a seasoned tax preparer, is both proud of her son’s accomplishments and prepared to use every available tax break to support his further education. Give me a call to figure out the ways the IRS can help you pay for your child’s future.