Americans face over $1.7 billion in student loan debt. That marks the second-highest form of debt held by American consumers behind just mortgage debt. Facing the burden of quickly rising college costs is a challenge modern families face when sending kids off to college. Thankfully, there are methods and tax strategies that allow you to ease that burden.
Higher education tax credits, including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit, create more flexibility and savings opportunities for families dealing with these expenses. Understanding how these credits work and how they apply to California families could make all the difference in getting your children the higher education they deserve without crippling debt.
Key Benefits of the American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is one of the most beneficial financial tools available for families with students pursuing a degree. It covers tuition, fees, and required course materials for the first four years of postsecondary education. The AOTC offers:
- A maximum credit up to $2,500 per student annually
- Covers 100% of the first $2,000 of qualified expenses and 25% of the next $2,000
- Even if no federal tax is owed, up to $1,000 of the credit is still refundable (credit is 40% of the remaining credit)
For example, if Brad owes $1,300 in taxes and is eligible for the $2,500 annual credit, there would be $1,200 left on top of the $1,300 in taxes that are taken care of by the credit. Brad can receive 40% of that $1,200 in excess for an additional refund of $480.
To qualify, students must be enrolled at least half-time in a program leading to a degree or recognized credential. The credit phases out for higher-income earners, with single filers beginning to lose eligibility at a modified adjusted gross income (MAGI) of $80,000 and joint filers at $160,000. You can still receive partial credit if your MAGI is above $80,000 but below $90,000 (or >$160,000 but <$180,000 for joint filers), but you lose all eligibility at that $90,000/$180,000 benchmark.
Flexibility with the Lifetime Learning Credit
The Lifetime Learning Credit is another important tax credit to offset some of the costs of college. This offers flexibility for students pursuing undergraduate, graduate, or professional education, as well as job training. Unlike the AOTC, the Lifetime Learning Credit has no limit on the number of years it can be claimed, making it a more versatile option for lifelong learners. Its benefits include:
- Up to $2,000 per tax return (not per student)
- Covers 20% of the first $10,000 of qualified education expenses
- Available for degree programs, certificate courses, and skills training
While the credit is non-refundable, meaning it can only reduce tax liability to zero rather than adding additional refunds like the AOTC, it’s an excellent choice for families or individuals with ongoing education needs. Similar to the AOTC, the LLC phases out for higher-income taxpayers, with thresholds beginning at $80,000 for single filers and $160,000 for joint filers.
Prepare for the High Costs of College
The cost of higher education doesn’t have to be overwhelming for your family. Federal tax credits like the AOTC and Lifetime Learning Credit provide valuable financial relief when used correctly as part of a personalized and thorough tax strategy.
At Dahl Law Group, our tax strategy services help California families maximize opportunities and reduce the burden of college expenses. Contact our offices in Sacramento or San Diego to learn how we can assist you.
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