Edited: 2nd May 2021
As college tuition bills begin arriving for the fall semester this month, start thinking about education tax credits.
Why?
There are two federal education credits available - the American Opportunity Credit and the Lifetime Learning Credit. There are rules on using these credits, including timing rules. So timing matters on when to pay these education expenses.
This rule specifically states the credit is claimed in the year the proceeds are disbursed, not when the loan is repaid.
For example, say you're planning to pay qualified tuition expenses with loan proceeds. You can claim an education tax credit for expenses paid with the proceeds of a loan in the taxable year in which the expenses are paid. That means when you pay tuition in 2020 with loan proceeds, you're eligible for a credit, you can claim the credit on your 2020 federal income tax return.
Payments for an academic period beginning in the first 3 months of 2021 can also be used to calculate an eligible credit on your 2020 tax return.
WHAT YOU NEED TO DO NOW:
1. PAY EDUCATION EXPENSES BY MARCH 31, 2021.
If you're wanting to use education expenses to calculate a tax credit you're eligible for on your 2020 tax return, you need to pay your tuition and other eligible education expenses no later than March 31, 2021.
2. OBTAIN FORM 1098-T.
To be eligible to claim the American Opportunity Credit or the Lifetime Learning Credit, the law requires you to have received Form 1098-T from an eligible educational institution.
3. CALL FOR ASSISTANCE.
Calculating the Opportunity Credit or the Lifetime Learning Credit can get complicated. If you need help, please call to a qualified financial advisor to make sure you are on the right track in this matter.