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College Tax Credits

August 23rd, 2015 at 07:41 pm

So...I know about the American Opportunity Tax credit. It seems it doesn't cover room and board. It does cover tuition, fees and books...after scholarships. For this semester alone we have $2100 towards those costs.

If I understand correctly, I can claim tuition paid in the first three months of 2016 on our 2015 return. This means probably another $2K of expenses. So around $4k that we will pay from sources that are not college savings plans. My understanding is if I take this money from our Coverdell ESA those expense covered with this money can not be claimed for a credit. Which is fine with me since I currently plan to use that money for room and board, which I can't claim for the AO credit.

Then my understanding is the first 2K in expenses is a 100% credit. The next $2K is applied at 25% for a maximum of $2500.

Since this is a credit, it will directly impact our taxes owed. Currently I have us withholding about $520 per month for taxes. I think this is slightly more than our taxes before this credit. Now I'm debating about changing our withholding knowing this new information. If I reduce it, then I can save it for the next tuition bill in February. Or I could keep withholding the same and get a big refund, which I could then use to pay back the tuition we pay in February. I making an assumption that I wouldn't have the IRS refund by the Feb 12 due date.

Am I making any sense? Any other guidance? The credit is nearly always better than a deduction, so I'm not even looking at that scenario.

8 Responses to “College Tax Credits”

  1. Joe Says:


    I think you are spot on in regards to the AOTC. I will be doing the same thing and have already adjusted my withholding.

  2. creditcardfree Says:

    Thanks Joe! I'm working on figuring the withholding adjustment now. I like that I have figured a way to come up with the spring semester tuition payment! Smile

  3. Joe Says:

    One clarification. If you want to claim next year's tuition on this year's taxes you must pay it this year (and the tuition must cover classes that begin in the first 3 months of next year).

    In other words you can get the credit for payments made in 2015 for academic periods beginning in 2015 or beginning in the first 3 months of 2016.

  4. creditcardfree Says:

    Thanks for clarifying that Joe...I'm not sure I caught that! I can make that work, especially if I change withholding now. Smile

  5. Joe Says:

    They don't make it easy, do they!

  6. FrugalTexan75 Says:

    I also think that you've got it figured out. Smile I was able to use the Lifetime Learning Credit (or something like that) for grad school, which worked somewhat similarly.

  7. Jenn Says:

    CCF, I do exactly what you describe. My son's college expects payment for the spring tuition in December, so it's easy to calculate how much more of the $4k I need to pay with cash for the year to qualify for the maximum Am Opp credit. The rest I take from the 529, even while I'm adding to that account, because our state gives a state tax credit for those contributions.

  8. creditcardfree Says:

    Thanks for sharing Jenn. So helpful to hear from others who are already doing it. It doesn't look like my daughter's college expects payment for spring until Feb not sure I can make a payment in 2015 for spring without it getting refunded!!

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