If you're paying for a child to attend college or graduate school, the tax law provides two valuable tax credits that may benefit your tax situation. The two credits are the American Opportunity Tax Credit and the Lifetime Learning Credit.
- American Opportunity Tax Credit (AOTC): In its current form, the maximum annual AOTC of $2,500 may be claimed for each student in the family for up to four years of study. For example, if you have three kids in school in the same year, the maximum credit is $7,500. However, for 2017 the credit phase-out occurs between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers and $160,000 and $180,000 for joint filers. It is available for qualified expenses like tuition and books, but not room and board.
- Lifetime Learning Credit (LLC): The LLC is a $2,000 credit, compared to $2,500 for the AOTC, and applies on a per-taxpayer basis. Therefore, if you have three kids in school in the same year, the maximum credit is still only $2,000. However, the LLC can be claimed for an unlimited number of years. The phase-out range for the LLC is even lower than the one for the AOTC. For 2017, it's $55,000 to $65,000 of MAGI for single filers and $112,000 to $132,000 for joint filers. The credit can help pay for undergraduate, graduate, and professional degree courses, as well as courses to improve job skills.
Which credit is best?
It may not be easy to determine on your own which credit is best for your family's situation. While on the surface the AOTC seems to provide the highest tax benefit, it is not always the case. For instance, it's sometimes possible for you to claim both credits on the same tax return as long as it's not for the same student or same qualifying expenses. You do not need to make this decision alone. To help decide which credit or combination of credits will bring you the most tax benefit, give us a call.
