Federal Tax Credits for College
College Student Filing Taxes
Working students or students with taxable income in excess of the standard deduction should file an annual IRS tax return. Students that have earned income with federal tax withholding may receive a refund. Students claiming the American Opportunity Tax Credit (AOTC) with earned income and claiming themselves may obtain up to a $1,000 additional tax refund.
New for 2018
In 2018 there is no exemption deduction but parents under $400,000 ($200,000 if filing other than joint status) in income can claim a $500 tax credit for each college student claimed as a dependent.
The standard deduction for a student is $12,000 on earned income and $350 on unearned income. A $1,050 unearned income standard deduction exists if all taxable income is below $1,050.
The 1098-T tax form can be obtained from the student’s college or will be sent in January to the student’s address. This form tells the IRS the student or the student’s parents may be eligible for an education tax credit up to $2,500. Students should also obtain a calendar year payment and charges transcript from the college to verify payments made during the calendar tax year. This transcript will prove the education costs have been paid during the tax year so that the American Opportunity tax credit can be claimed.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is a maximum $2,500 tax credit reducing your federal taxes or up to $1,000 extra refundable tax credit. A parent can claim the AOTC credit by claiming their college student as a dependent on the parents return. Before claiming the AOTC credit make sure none of the rules keep you from claiming the AOTC credit. A student can get a $1,000 refundable AOTC tax credit refund if the student has earned income equal to more than one half of the students annual support and claims themselves on their filed income tax return. If the student claims themselves their parents can not claim them.
Scholarship reported as Income
If the 1098-T reflects more grant income than education costs a student can elect to report the grant and scholarship income as applicable to room and board and thus subject to federal income tax. If enough grant income is reported to result in a net education cost (education cost less non taxable grant income) of $4,000 then a maximum AOTC tax credit of $1,500 non refundable and $1,000 refundable is available for the parent or the student.
High income parents
Parents with high taxable income may not get any benefit for claiming a college student or the $500 benefit may be less than the $1,000 a qualified college student can receive if they claim themselves. Parents with adjusted gross income over $90,000 ($180,000 if filing jointly) do not qualify for the AOTC $2,500 tax credit but a working student may qualify if they claim themselves.
Student should claim the AOTC Refund (An Example)
Parents income is $200,000 and student works during school and breaks and earns $20,000 which is more than half of students annual support costs. Parents will save $500 by claiming student on their tax return. Student will save $1,800 which includes $800 from work income taxes plus the $1,000 AOTC refundable tax credit. Student should claim himself saving $1,800 but cost his parents $500.
Parents should claim the AOTC Refund (An Example)
Parents income is $100,000 and student works during school and breaks and earns $12,000 which is more than half of students annual support costs. Parents will save $3,000 by claiming student on their tax return. The parents get the $500 tax credit for a dependent over 17 plus a $2,500 AOTC tax credit. Student will get a $1,000 refund of the AOTC refundable tax credit. Parents should claim student as a dependent on their tax return saving $3,000 in taxes but costing the student $1,000 for not claiming himself and losing the AOTC refund.
One education tax credit per student per year
Both the Lifetime Learning Tax Credit and the American Opportunity Tax Credit are available to a student or their parents. Each year only one type of tax credit can be selected per student and only one tax return can be used to take the college education tax credit
One dependent deduction per student per year
If the student claims themselves on their tax return then the parents can not claim the student or the education tax credits. If the parents claim student as a dependent then student can not claim themselves or any education tax credits. The IRS accepts the first return that claims the student and reject a second return that claims a student in the same tax year. An error can be corrected by filing an amended return.
International students on F-1 or J-1 visas cannot claim education tax credits because during first 5 years in US they are considered nonresident aliens and not eligible for education tax credits. Students of overseas parents who have maintained their US citizenship can claim education tax credits. If the student is claimed by their overseas parents the parents can claim the education tax credits. Many overseas parents make too much income to claim education credits. A working student earning enough money to cover more than half of the students annual support costs should file for the $1,000 refundable AOTC tax credit if they are a US citizen with a social security card even though their family lives overseas.
Dependent without earned income can’t get AOTC refund
AOTC $1,000 refundable tax credits can be obtained by a student but the student must have enough earned income to provide more than half of the student’s support. Without earned income a student can’t receive the AOTC refundable $1,000 tax credit.
Students can get a tax refund
Working students that file an annual IRS tax return with federal tax withholding will receive a refund. Students claiming the American Opportunity Tax Credit (AOTC) with earned income and claiming themselves may obtain up to a $1,000 additional tax refund in addition to their tax refund from work withholding amounts. A student filing a tax return and requesting a tax refund for the American Opportunity Tax Credit when their situation allows them to is an extra $1,000 refund that may go unclaimed if an effort is not made to file a tax return