Sigma Tax Pro Breaks Down IRS Education Tax Credits
Tax professionals are often challenged by the complex nature of education tax credits such as the American Opportunity Credit and the Lifetime Learning Credit.
Many professional tax preparers have run into challenges in recent years when their clients have claimed education tax credits. The IRS reported in 2011 that 72 per cent of education tax credits were claimed incorrectly. In many cases this was due to the student not having actually attended college at all. However these incorrect claims are often attributable to honest mistakes by the tax professional who does not understand which clients are eligible for which credit and which are not eligible at all.
The American Opportunity Credit is worth up to $2,500 per eligible student and is only available for the first four years at an eligible college or vocational school. This means it cannot be claimed for graduate programs but it can be subtracted from your taxes and also give you a refund of up to $1,000 if it’s more than your taxes. It must be for students who are earning a degree or other recognized credential and are going to school at least half-time for at least one academic period that started during the tax year. Finally it can be claimed for the cost of tuition, books and required fees and supplies.
The Lifetime Learning Credit is limited to $2,000 per tax return, per year, no matter how many students qualify. However unlike the American Opportunity Credit it is for all years of higher education and includes classes for learning or improving job skills. Another distinction between the two is that the Lifetime Learning Credit is limited to the amount of your taxes. The Lifetime Learning Credit is also applicable to the cost of tuition and required fees, plus books, supplies and equipment, but you must buy them from the school. The two credits are quite similar but tax pros must know how to distinguish the two in order to provide excellent service to their clients. For more information please consult Publication 970 on the IRS website.
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