Tax Credits for College-Aged Kids
You may be making a mistake if your kids are college-age and you’re not taking advantage of the American Opportunity Tax Credit and Lifetime Learning Credit.
In this video, Forbes Best-In-State Wealth Advisor, Cary Stamp, CFP®, provides an overview of these two significant tax credits available to families with more than $160,000 in income.
If you and your family have an income greater than $160,000 and you have kids that are over age 17 that are in college, you’re probably making a huge mistake…
You see, throughout most of my career, on the income tax return, we would check off our children up until the age that they were out of college as dependents. Well, something changed in 2017 and probably made that something that you shouldn’t be doing because you’re losing out on a lot of money by doing it. In 2017, the Tax Cut and Jobs Act eliminated the exemption for dependents on your tax return. You now get a zero deduction for any dependent that you have on your tax return.
In exchange for that, what they did was they increased the standard deduction, which is like a personal exemption for the husband and a wife, for each spouse, or for a single person, and made that an amount that in 2022 is going to be $12,950. So the first almost $26,000 of income that you make is immediately deducted off of your total income when calculating your taxes owed.
But they didn’t give you anything for your kids. And most accountants continued to check the box that says this kid, even though they’re in college, is still a dependent. And if you prepared your own returns, how would you know this stuff anyway? So what can you do? If you claim the child, you’re going to lose these tax credits for college-aged kids.
Here’s the first option: the American Opportunity Tax Credit, which is a direct tax credit that your child can claim on their income tax return, as long as they have the need to file an income tax return, they have a part time job, they report income from babysitting, any of those types of things. They can claim this tax credit if they’re attending college, pursuing a degree, and there’s tuition paid for them for which they get a form from the college at the end of the year that shows that they paid the tuition. If they file and they get this credit, they get up to $2,500, even if they don’t owe any tax, meaning that they could actually get a check back to them in their pocket if their income was even less than $2,500. It’s a credit, not a deduction.
The second type of credit doesn’t even require them to be pursuing a degree. They could be going to trade school, they could take an educational course. And this one is called the Lifetime Learning Credit. It is a credit up to $2,000 that is applied to the taxes that you owe. It’s not refundable like the $2,500 amount, but if you owe more than $2,000 worth of taxes, it’s immediately deducted off of your $2,000 worth of income tax liability and is a credit on your income tax return. And I want to stress the word credit, because they actually give you the money. It’s not a deduction. It’s $2,000, not $2,000 that you get to write off. These are huge credits.
So think about this. If you’re claiming your kids on your tax returns and they’re eligible for the American Opportunity Tax Credit and they’re going to college, and you’re doing this for four years, making your kids a dependent when you get no benefit from it and they could be filing their own tax return, you’re losing out on four years of $2,500 credits. If you have two kids in school, you’re losing out on $20,000 when you’re sending your kids to school.
If you have questions, talk to your tax preparer. Call us. We’ll help you walk through so that you get what you’re entitled to when you’re filing your income tax returns. I’m Cary Stamp and this has been a Principled Wealth Moment.