Tax 101: Education Credits Equal Tax Savings


Was this the year you sent your child off to college? It is a time of mixed emotions – exciting, scary, bright thoughts for the future, but we also hear more and more often of the costs involved with college. Tuition, books, room and board are some of the costs, not to mention transportation, clothing and entertainment.

529 college savings and paying for education concept with piggy bank wearing eyeglasses alongside textbooks
529 college savings and paying for education concept with piggy bank wearing eyeglasses alongside textbooks

Hopefully you are fully prepared with a College Savings Fund and have it covered. Or maybe your student is getting financial aid. Well, Uncle Sam is willing to help a little with the following tax credits, but remember you can only use one of these options at a time on the same student. New this year, you will need to have received a form 1098T from the educational institution in order to take either of the credits below.


#1 American Opportunity Credit (AOC)

This credit will pay the most back to you of the choices available. If your child is enrolled at least half time and is in the first four years of their post-secondary education at a qualified school (can be trade school or a four year college), then you (or your child if they are not a dependent of yours) may be eligible for a credit up to $2,500. This credit is particularly appealing since up to $1,000 of it can be refunded to you, even if no tax is owed. The eligible expenses are tuition, books and required supplies. Room and board is not included. It is calculated by taking 100% of the first $2,000 of expenses and then 25% of the next $2,000. This credit was set to expire in 2017, but it was permanently extended by Congress in December 2015.


#2 Lifetime Learning Credit

If you are not able to take the American Opportunity Credit, then the Lifetime Learning Credit might be available. This credit is worth $2,000 toward the same qualified education expenses as the AOC. This is available for an unlimited number of years and for any classes as long as the classes are taken at an eligible institution. However, it is nonrefundable, so you must have tax liability to use it. It is calculated by taking 20% of the qualified expenses up to a maximum of $10,000 of expenses.


These credits both begin to phase out at certain adjusted gross income amounts. The AOC starts to phase out at modified adjusted gross income of $80,000 for singles and $160,000 for married couples. The Lifetime Learning credit can be claimed if your modified adjusted gross income is less than $65,000 if single or $130,000 for married filing joint couples.


#3 Qualified Tuition Program

If your child hasn’t started college yet, or even if they have more years in school left, you can make contributions to a qualified tuition program, or a “529” plan. This allows you to put money into a college savings plan, and if it is spent for education expenses of tuition, books, supplies, and room and board for a student attending at least half time, then the earnings on the money invested are never taxed. If you are an Iowa resident and contribute to the Iowa College Savings Program for your dependent, you can deduct up to $3,188 against your Iowa income, no matter what amount of taxable income you have. You can also deduct this amount for each beneficiary.


As you send your children off to college, this will hopefully help you “learn” something new about the tax law and give you some tax savings to help offset some of the costs incurred.



Kathi Koenig, CPA
Partner – McGowen, Hurst, Clark & Smith, P.C.
p. 515.288.3279


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