As part of the divorce process, parents must decide who will claim their child as a dependent on their income taxes. One parent may claim the child every year, or parents may agree to an alternating year schedule.
When children are very young, divorcing parents are mainly concerned with who gets to claim the dependent child tax credit. However, when children enter college, other tax credits and deductions become available that parents may not have been aware of during their divorce.
Have a child in college — and is it your turn to claim them as a dependent? Check out these four extra tax breaks that you could help you reduce how much you owe the IRS.
1. American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500 per eligible student for qualified education expenses, such as tuition. If your tax burden is low and you do not owe the IRS, you can get a big bonus of up to 40 percent ($1000) of the credit refunded to you in cash.
To be eligible for the AOTC, your dependent child must currently be pursuing a degree and be enrolled at least half-time. You can only apply for the credit for four years, so if your child takes longer to complete their degree, eligibility is affected. Income limits also apply. Complete Form 8863 to see if you qualify.
2. Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is worth up to $2,000 and is for qualified educational expenses, such as tuition and fees for your dependent child. To be eligible, your dependent must be enrolled in an approved educational university or college, for at least one academic period (i.e., a semester) during the tax year. Unlike the AOTC, there is no limit on how many years you can claim the LLC. If your tax burden is low, however, you will not receive the excess. To see if you can claim the LLC, complete the same Form 8863.
3. Tuition And Fees Deduction
The tuition and fees deduction allows you to deduct up to $4,000 of your dependent child’s tuitions and fees on your tax return, reducing your taxable income and lowering your overall tax burden. Expenses you deduct must be involved with higher education and cannot include living expenses like room and board and/or an apartment your child rents while away at school. Also note that you can get the deduction even if you do not itemize your taxes, but income limits apply.
4. Student Loan Interest Tax Deduction
If you are the parent of a dependent college student and you made payments on a qualifying student loan, you can deduct up to $2,500 of the interest you paid over the course of the year. To qualify, you must have paid interest on your dependent child’s student loan in 2017. Income limits apply and the IRS is specific that your filing status must be single or married filing jointly (generally, spouses retain married filing jointly status until their divorce is finalized.) If you file your taxes as married filing separately, you are not eligible for this deduction. See if you qualify for this tax break by using the student loan interest deduction calculator.
Claiming Credits And Deductions
As a general tax rule, be aware it’s one child, one tax credit or deduction so you will need to carefully determine which one(s) you are eligible for and which one offers you the most tax savings before you file. Many parents end up opting for the $4000 tuition and fees deduction as it can push them into a lower tax bracket, but every tax situation is different. If you have multiple children in college and are claiming them as dependents, you can generally take one credit or deduction per dependent child, allowing you to multiply your tax break.
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Filing Tax Returns After Separation or Divorce
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