Higher education is pricy. But there are two valuable tax credits that can help parents and students offset the cost of college or vocational education: the American opportunity tax credit and the lifetime learning credit. Our experts here at Tax Defense Partners explain how these two education tax credits can help you with your college costs.
The American Opportunity Tax Credit
Maximum Yearly Benefit: $2,500 Per Eligible Student
The American Opportunity Tax Credit (AOTC) is a tax credit for education expenses related to the first four years of higher education. Those who qualify for the AOTC can get a maximum annual credit of $2,500 per eligible student. Taxpayers can claim 100% of the first $2,000 they spend on eligible higher education expenses. Then, they can claim 25% of the next $2,000 spent.
This tax credit is partially refundable. If you apply the AOTC to your tax liability and go below zero, you can receive 40% of the remaining amount of credit as a refund (up to $1,000).
Students must be pursuing a degree or other applicable educational credential to claim the AOTC. They must also be enrolled for at least half time of at least one academic period in the tax year.
This credit can be claimed in full if your modified adjusted gross income is $80,000 or less for single filers or $160,000 for joint filers. This credit can be claimed partially if your income is over $80,000 but under $90,000 for single filers, or over $160,000 but under $180,000 for joint filers.
Students cannot claim the AOTC if they have a felony drug conviction or if they have claimed the AOTC (which was also once called the Hope credit) in four tax years previously. Additionally, students cannot claim the AOTC if they have finished their first four years of higher education at the beginning of the tax year.
This credit cannot be claimed by those with a modified adjusted gross income of $90,000 or higher for individuals or $180,000 or higher for joint filers.
How to Claim the Credit
To claim the AOTC, you must receive a Form 1098-T (Tuition Statement) from your eligible educational institution. Then, you must you complete Form 8863 (Education Credits) and attach it to your Form 1040 (Individual Income Tax Return).
The Lifetime Learning Credit
Maximum Yearly Benefit: $2,000 Per Tax Return
The Lifetime Learning Credit (LLC) is a credit for expenses related to post-secondary school (post-high school). Unlike with the AOTC, a student does not have to be working toward a degree to qualify for this credit. Expenses related to things like undergraduate education, graduate education, and professional degree courses (this includes courses that allow you to obtain or improve job skills) can all apply to the LLC credit.
The LLC allows taxpayers to claim 20% of their first $10,000 applicable education expenses within the tax year (for a maximum of $2,000 in credit).
To qualify for the LLC, students must be enrolled or taking courses at an eligible institution to claim their education expenses. They must also be taking these courses to get a degree, another recognized education credential, or to get or improve job skills. Then, students must also be enrolled for at least one academic period that begins within the tax year.
You can claim the LLC yourself if you have qualifying education expenses for higher education and you pay them yourself. Additionally, you can claim this credit for a dependent or spouse that is listed on your tax return if they have qualifying education expenses for higher education and you pay these expenses.
Unlike with the AOTC (which can be claimed for a maximum of four years per student), there is no limit on the number of tax years for which you can claim the LLC. However, note that the AOTC and the LLC can never be claimed within the same year. The IRS allows taxpayers to claim only one of these education credits each year.
Those who have a modified adjusted gross income of $57,000 or less for single filers or $134,000 or less for joint filers can claim the full LLC amount. Those who have a modified adjusted gross income that is between $57,000 and $67,000 for single filers or $114,000 and $134,000 can claim a reduced amount of the LLC.
Those who have a modified adjusted gross income of $67,000 or higher as a single filer or $134,000 as a joint filer cannot claim the LLC.
How to Claim the Credit
As with the AOTC, you must receive a Form 1098-T in order to claim the LLC. Then, you must complete Form 8863 and attach your Form 8863 to your Form 1040.