Education Credits and Tuition and Fees Deduction (Form 1098-T)

Education tax credits help offset the expenses of higher learning by reducing the tax an individual would owe the IRS and may increase their refund if they have no tax liability. There are several different types of education credits. Keep in mind, none of these credits are available if the taxpayer’s filing status is ‘Married Filing Separate’, or if you are claimed as a dependent on someone else’s return. Credits can be claimed for the taxpayer, as well as any qualifying dependents.

Students will be given Form 1098-T to show either payments paid to or billed from an educational facility. If students paid qualified tuition, or if someone paid on the student’s behalf, the student (or if the student is a dependent, the taxpayer) may be able to claim an education credit on their tax return. Students cannot claim an education credit for any amount that was not paid as a qualified tuition or expense. Just being billed does not qualify the student for the credit.

You may be able to deduct qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent whom you claim as an exemption, as a tuition and fees deduction. The student must be enrolled in one or more courses at an eligible institution and have a high school diploma or GED. To determine whether your expenses are qualified, refer to Publication 970. You do not have to itemize to take this deduction.

You can claim only one type of education credit per student in the same tax year. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial – the tax credit or the deduction. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

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View A Sample Form 1098-T

American Opportunity Credit – The American Opportunity Credit offers a maximum tax credit of $2500 for qualified education expenses for each qualifying student on a tax return. This credit is available only for the first four years that an individual is in college. Up to 40% of the credit is refundable, which means that if the taxpayer has no tax liability, up to $1000 can be added to their refund. This credit starts to phase out when the taxpayer’s modified adjusted gross income reaches $80,000 and is disallowed when their AGI reaches $90,000.

Lifetime Learning Credit – The Lifetime Learning Credit offers a maximum credit of $2000 per tax return, regardless of how many qualified students are on the return. This credit is available for any qualified education expenses as long as the student is enrolled in at least one course at an eligible institution. The benefit begins to phase out when the taxpayer’s modified adjusted gross income reaches $50,000 and is disallowed when their AGI reaches $60,000. This credit is non-refundable, meaning the credit will only reduce tax liability. Once the tax liability is reduced to zero, any remaining credit will not be added to the refund.
Tuition/Fees Deduction – The Tuition and fees deduction allows taxpayers to deduct a maximum of $4,000 for qualified students enrolled at an eligible educational institution. Taxpayers can only claim a deduction for the amounts they paid for the educational expenses. If expenses were paid by some other benefit, the student, or by some other third party, the taxpayer cannot claim a deduction. This deduction reduces the adjusted gross income. If the taxpayer has no adjusted gross income, this deduction offers no benefit. The Tuition and Fees Deduction expired at the end of 2016 and starting in 2017 is no longer available.

For applicable years, to enter Education Credits in Keystone Tax Solutions, from the Main Menu of the tax return select:

Credits Menu

Education Credits (8863)

Select ‘New’ or double-click the entry you wish to ‘Edit’.

Select the student that is eligible for the Education credit from the drop box

Enter the qualifying expenses for this student

Select the option you wish to apply – American Opportunity Credit, Lifetime Learning Credit, or Tuition & Fees Deduction

To enter the Tuition and Fees Deduction in Keystone Tax Solutions.

Adjustments Menu

Tuition and Fees Deduction (8917)

Select ‘New’ or double-click the entry you wish to ‘Edit’.

Select the student that is eligible for the Education credit from the drop box