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Income-Related Phaseout of Education Credits

Unfortunately, the American Opportunity credit and Lifetime Learning credit are phased out for those at higher income levels.

warning

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.

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.

Example

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.

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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