Income-Related Phaseout of Education
Credits
Unfortunately, the American Opportunity credit and Lifetime Learning credit are phased out
for those at higher income levels.
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Warning A parent is entitled to claim tax credits
for qualified higher education expenses if they claim the child as
a dependent. Because the credits are phased out when a taxpayer's
modified adjusted gross income exceeds a specific level, taxpayers
with dependent children attending college may want to reconsider whether
they should claim the dependency deduction for their child. The child
may claim the credit if the child is not claimed as a dependent by
any taxpayer for the year at issue. Under some circumstances it may
be advantageous for a parent to give up the dependency deduction and
allow a child to claim the credit. Note that regardless of whether
or not a child is claimed as a dependent, if the child can be claimed
as a dependent, the child's personal exemption is reduced to zero. |
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American Opportunity Credit
The 2014
phaseout begins at modified adjusted gross income of $80,000 for singles
($160,000 for married, filing jointly). To determine whether your
credit will be affected by the phaseout, you must compute your modified
adjusted gross income: your AGI as shown on Line 37 of Form 1040 (or
Line 21 on Form 1040A), plus any foreign earned income exclusion,
plus amounts derived from sources in American possessions if you are
a resident of the possession (Guam, American Samoa, the Northern Mariana
Islands, or Puerto Rico).
The phaseout is computed by reducing
the amount of your credit by a fraction. The fraction is found by
taking the amount of your modified AGI that exceeds $80,000 (or $160,000,
if filing jointly) and dividing it by $10,000 (or by $20,000 if filing
jointly). Thus, the American Opportunity credit is fully phased out
at MAGI of $90,000 for single filers and $180,000 for married filing
jointly.
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Example Eric and Carmen are married filing jointly,
and have twin sons who are both freshmen in college in 2014. For
each of the boys, tuition costs exceed $4,000. Eric and Carmen would
normally have an American Opportunity credit of $2,500 for each son,
or $5,000 in total. However, their AGI is $164,000, so they must reduce
their credit as follows: Their AGI exceeds $160,000 by $4,000, and
they divide $4,000 by $20,000 to get a fraction of 1/5. Therefore,
1/5 of their credit will not be allowed, and they can claim a credit
of only $4,000 for 2014. |
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Lifetime Learning Credit. For 2014, the
phaseout of the Lifetime Learning Credit begins when adjusted gross
income exceeds $54,000 ($108,000 on joint returns).
Claiming
the Credit
To claim the American Opportunity credit (or
the Lifetime Learning credit) you must complete IRS Form 8863, Education
Credits, and attach it to your Form 1040 or 1040A. These credits
are subtracted from your tax liability after the foreign tax credit
and the credit for child and dependent care expenses. Forty percent
of the amount you can claim as an American Opportunity credit is refunded
to you, even if you have no tax liability. Thus, if your tax liability
is zero in 2014, but you have an American Opportunity credit of $2,500,
you can add $1,000 to any refund you have coming.
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