U.S. Tax Preparation Worldwide   James Maertin CPA

 
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Tax Guide 

IRS Tax Law Changes

Americans Abroad

Capital Gains, Interest and Dividends

Deductions

Dependents

Education Credits, Scholarships

Foreign Bank Reporting

Foreign Nationals

Social Security, Medicare, Self Employment Tax

State Taxes

Tax Deadlines, Extensions, Late Payments, Estimated Tax

Tax Resident, Nonresident, Dual Status

Other Topics

 

Education Credits, Scholarships


The three major college tuition tax breaks and their qualification requirements. 

 

American Opportunity Credit

Lifetime Learning Credit

Tuition and Fees Deduction

How much is it worth?

100% of the first $2,000 of qualified expenses, 25% of the next $2,000 ($2,500 max)

20% of the first $10,000 of qualified expenses.

Up to $4,000 on qualifying expenses excluded from income.

Refundable?

Up to $1,000 for students aged 18-23

No

N/A

Income limit for full benefit

$80,000 (single)
$160,000 (joint)

$55,000 (single)
$110,000 (joint)

$65,000 (single)
$130,000 (joint)

Income phaseout limit for partial benefit

$90,000 (single)
$180,000 (joint)

$65,000 (single)
$130,000 (joint)

$80,000 (single)
$160,000 (joint)

Restricted to undergraduate study?

Yes

No

No

How many years can you claim it?

4

Unlimited

Unlimited

Required to take classes on at least half time basis?

Yes

No

No

Must have been issued Form 1098-T

Yes

No

No

 

Qualified education expenses must be paid by:

Note: Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.

Funds Used

You can claim an education credit for qualified education expenses paid by cash, check, credit or debit card or paid with money from a loan.
If you pay the expenses with money from a loan, you take the credit for the year you pay the expenses, not the year you get the loan or the year you repay the loan.

You cannot claim a credit for education expenses paid with tax-free funds. You must reduce the amount of expenses paid with tax-free grants, scholarships and fellowships and other tax-free education help.

Qualified Education Expenses for Education Credits

Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period* that starts during the tax year or the first three months of the next tax year. 

Eligible expenses also include student activity fees you are required to pay to enroll or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.

For American Opportunity Credit only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.

Expenses that Do Not Qualify

Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:

 

You must pay the expenses for higher education that result in a degree or other recognized education credential. For the Lifetime Learning Credit, you can qualify if you take the course to acquire or improve your job skills.

 

Scholarship and Fellowship Grants

Residents (Form 1040):

If you were required to work for your scholarship, your scholarship is taxable.
If your scholarship was used for tuition, books, fees or supplies required for your courses, and you did not work for it, then it is not taxable. 

Tax Treaties: Generally, only nonresidents may use the terms of a tax treaty to reduce or eliminate U.S. tax on income from a scholarship or fellowship grant. A student (including a trainee or business apprentice) or researcher who has become a resident alien for U.S. tax purposes may be able to claim benefits under a tax treaty that apply to reduce or eliminate U.S. tax on scholarship or fellowship grant income. Most treaties contain a provision known as a "saving clause." Exceptions specified in the saving clause may permit an exemption from tax to continue for scholarship or fellowship grant income even after the recipient has otherwise become a U.S. resident alien for tax purposes.

Nonresidents (Form 1040NR):

Any U.S. source (U.S. payer) scholarship or fellowship grant used to pay for tuition, fees, books and supplies required for your courses is not taxable. However, any part of a scholarship you worked for is taxable. Exception: If there is a tax treaty between the United States and your home country, it might contain a provision excluding scholarship payments.  The amounts you used for expenses other than tuition and course-related expenses (such as room, board and travel) are generally taxable.  Foreign source scholarships are not taxable, and do not have to be reported on the return.