The IRS and the state of Michigan offer various tax credits to help offset the cost of higher education. Are you taking advantage of all the credits available to you? Here are two commonly overlooked tax credits for college students and parents.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) was created to help taxpayers pay for college expenses and is available to many taxpayers – individuals, parents of students, those with high incomes, and even those who owe no tax. This credit has income limits – $160,000 (married filing jointly) and $80,000 (individuals). You can claim this credit for qualifying expenses which can include tuition, fees, and required course materials.
The maximum credit amount is $2,500 per student. If the credit brings your tax owed to zero, 40% of the remaining credit amount is refunded to you.
For college students who have earned income, the education credit may be available to offset any tax from that income. If you want to claim this credit as a parent, you can’t claim your child as a dependent. And, your child can’t 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 this exemption.
We recommend preparing both parent and student returns to learn how to maximize this credit. You’ll need Form 1098-T, provided by the student’s educational institution, to help you calculate the credit. To claim, complete Form 8863, Education Credits, and attach it to your federal tax return.
Michigan Homestead Property Tax Credit
Michigan’s Homestead Property Tax Credit is available to students regardless of their parents’ income. This credit is based on a student’s income and the rent paid to occupy a Michigan homestead. Any dorm fees or rent paid to a college or university don’t qualify. Students may qualify for this credit if 20% of the rent paid exceeds 3.5% of their income. However, the student’s income does include gifts or expenses paid on the student’s behalf.
Put together a list of expenses you or another party paid on your child’s behalf – rent, allowance, groceries, etc. Detail your child’s earned and unearned income. This will help you determine if this credit applies to you or your child. To successfully claim this credit, you’ll need to provide the address of the rented property, the landlord’s address, and the amount of monthly rent. Then, file Form MI-1040CR with your Michigan individual income tax return.
Have questions about tax credits available to college students? Let’s talk!