Requirements Tighten for Education Tax Credits in 2016

Each year, tens of thousands of taxpayers claim an education tax credit to help offset the cost of tuition, books, and other qualified fees. There are two different credits currently available; The American Opportunity credit and the Lifetime Learning credit. Eligible taxpayers are allowed to choose one credit or the other, but not both. To crack down on fraud, the IRS is requiring additional documentation to claim these credits on your 2016 federal tax return.

Before discussing the new requirements, here is an overview of each credit:

American Opportunity Credit

• Annual limit of up to $2500 per student;

• Can be used to reimburse for undergraduate and graduate studies;

• Must be enrolled at least part-time in a degree program;

• Qualifying expenses include tuition and course-related books, equipment and supplies;

• If the student does not owe income tax, 40% of the credit is refundable (up to a maximum of $1000);

• Can only be claimed for a maximum of four tax years;

• Subject to income limitations.

Lifetime Learning Credit

• Annual limit up to $2000 per student;

• Can be used to reimburse for undergraduate and graduate studies as well as courses used to improve or acquire job skills;

• No minimum program enrollment requirements;

• Qualifying expenses include tuition, books and other fees;

• Credit is not refundable;

• No limit on number of tax years it can be claimed;

• Subject to income limitations.

Changes for the 2016 Tax Year

Beginning this current tax year, students will need to prove that they attended class to claim either of the available education tax credits. This is accomplished by having eligible educational institutions file a Form 1098-T (Tuition Statement) for each student who was enrolled and for whom a reportable transaction was made. Without the Form 1098-T, you will not be able to claim the credit. So when you enroll in school this year, make sure to speak with someone in the finance office to ensure they will be filing this form, otherwise, you may find the credit you were counting on is not available when you file your taxes next year.

Educational tax credits assist numerous taxpayers who need assistance with tuition and other expenses while pursuing higher education. If you are a student and want further details about either of these credits, speak with your local accounting firm.