Overlooked Tax Credits for College Students and Their Parents

The IRS and State of Michigan offer various tax credits to help offset costs paid by United States taxpayers, especially when it comes to higher education. Are you taking advantage of all the credits you might qualify for?

AMERICAN OPPORTUNITY TAX CREDIT

The American Opportunity Tax Credit (AOTC) was created to help pay for college expenses and is available to a range of taxpayers – individuals, parents of students, those with high incomes, and even those that owe no tax. Income limits for this credit are $160,000 for parents (married filing jointly) and $80,000 for individuals. This credit can be claimed for qualifying expenses which can include tuition, fees and required course materials. The maximum credit amount is $2,500 per student.

For college students who have earned income, the education credit may be available to offset any tax from that income. For parents to claim this credit, they cannot claim the child as a dependent and the student cannot claim an exemption. For many high income taxpayers who would lose all or a portion of their dependency exemption, there may be minimal or no tax cost to losing said exemption.

We recommend preparing both parent and student returns to learn how to maximize this credit and using Form 1098-T, provided by the student’s educational institution, to help you determine the amount of the credit available to you.

To claim, complete Form 8863, Education Credits, and attach it to federal Form 1040 or Form 1040A.

MICHIGAN HOMESTEAD PROPERTY TAX CREDIT

The Michigan Homestead Property Tax Credit is available to students regardless of their parents’ income. This credit is based on the student’s income and rent paid. Rent paid to a college, university or any dorm fees do not qualify. Students may qualify for this credit if 20 percent of the rent paid exceeds 3.5 percent of their income. However, the student’s income does include gifts or expenses paid on the student’s behalf.

To determine if this credit applies to you or your child, put together a list of expenses you or another party paid on your child’s behalf (rent, allowance, groceries etc.) and detail your child’s earned and unearned income. You will likely be asked for the address of the rented property, the landlord’s address and the amount of monthly rent to successfully claim this credit.

To claim, file Form MI-1040CR with your Michigan Individual Income Tax return.

To learn more, contact your Beene Garter Professional via the form available here or via phone at 616.235.5200.