Many provisions of the Internal Revenue Code are complicated. Proper interpretation of the rules and regulations contained in these provisions requires the assistance of an experienced and knowledgeable tax professional. The fourth part of our series about the most confusing provisions of the Internal Revenue Code addresses education tax incentives.
Why Is It Confusing?
- There are a large list of incentives from which to choose
- New stricter requirements to establish eligibility for some incentives
- Determining eligibility is a complicated, arduous, lengthy process
- Difficulty in determining the correct and appropriate benefit
There is a minimum of fourteen different tax incentives for higher education. The IRS’ Publication 970, Tax Benefits For Education, is 86 pages in length and includes a two-page table listing all of the different qualifications which make students eligible, and which education expenses qualify for each of eleven (11) different tax breaks. With so many choices, many families claim the wrong benefit and don’t maximize their tax breaks.
Some of the things that Publication 970 addresses, just for the tax year 2016, include:
- Student loan interest deductions;
- American Opportunity Tax Credit (AOTC);
- Lifetime Learning Credit;
- Coverdell ESA rollovers;
- Coverdell ESA qualified higher education expenses;
- QTP qualified higher education expenses;
- Re-contribution of refunded education expenses to a QTP;
- Achieving a Better Life Experience (ABLE) account; and
- Business deduction for work-related education.
The American Taxpayer Relief Act of 2012 extended the American Opportunity Tax Credit through December 31, 2017. This tax credit assists with the cost of higher education expenses such as tuition, course materials and other certain eligible fees for four years, which differs from the Hope scholarship credit because the credit may be claimed for four years instead of the two allowed under the Hope credit.
However, beginning this tax year in 2016, student taxpayers must complete and submit Form 1098-T to claim any educational tax benefits for “qualified educational expenses.” This form verifies the payment for “qualified educational expenses” in the preceding tax year. All students must be aware of this new requirement to prove eligibility for education tax breaks in 2016. Without this official verification, students cannot claim the AOTC or Lifetime Learning Tax Credit (LLTC) for the tuition and fees deduction.
What may be confusing about the AOTC is that If the credit exceeds tax liability, it may trigger a refund, unlike most other credits which are “nonrefundable,” and don’t result in a refund. This credit was scheduled to revert to the Hope Credit limits in 2018, but Congress made the American Opportunity Credit permanent in 2015.
Sorting through all of the available tax incentives for education is complex and cumbersome. An experienced and knowledgeable tax professional may help guide you through this process to help ensure you maximize all of the benefits to which you are entitled. If you have questions about whether your costs and expenses related to your education are qualified educational expenses and may be legally deducted, call THE TAX EXPERTS AT THE Thorgood law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
