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financing educationFrom Pell grants that offer college money to low-income people to the American Opportunity tax credit, there are a variety of avenues to explore for financing education. According to a recent article by NBC News, the Obama administration has even proposed making community college free and universal. Although it’s still too soon to know whether Congress will adopt the plan to pay for the first two years of college as long as a student keeps a 2.5 grade point average, you could still receive money back at tax time for college expenses. According to a report by the IRS, the American Opportunity Tax Credit would have expired in 2012, but lawmakers extended it as part of the American Taxpayer Relief Act. Eligible students or parents rece ive a tax credit through December of 2017, at which time Congress could extend the program again.

  • Claiming the credit

You can claim the tax credit for the full four years of education required to receive a bachelor’s degree. The maximum amount a student can claim is $2,500. The government allows people to include the cost of tuition as well as required books and course materials.

  • Receiving a greater benefit

A tax credit is typically more valuable than a tax deduction. A tax deduction reduces your taxable income. On the other hand, people subtract a tax credit from the actual tax liability or amount owed. If you don’t owe any money, you receive some of the tax credit as part of a refund. According to the IRS, if the amount of the tax credit is more than your tax liability, you receive up to the lesser of 40 percent of the credit or $1,000.

  • Qualifying for the credit

As part of your education financing, a tax credit is very valuable if you are eligible. To be eligible, an individual would have a modified adjusted gross income of $80,000 or less.  Married people filing a joint return with a household modified adjusted gross income of $160,000 are eligible.

  • Understanding what isn’t included

When it comes to claiming the full tax credit, it’s important to know what kind of expenses qualify as well as which ones don’t. Of course, your tax adviser can help you work out the specifics. According to the IRS, some of the expenses that do not qualify for the tax credit include transportation to college, room and board, medical expenses, insurance. Expenses paid with tax-free educational assistance and those used for any other tax deduction do not qualify to prevent “double dipping.”

Education financing includes scholarships, student loans and grants, but many middle-class families often miss out on the beneficial tax credits because they aren’t aware of them. Look for a Form 1098-T, Tuition Statement from the college you attend, and be sure to give it to your tax preparer.

For more information on financing education and the best career track for you, please contact us.

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