The Basics of Education Tax Credits
There are tax credits to help parents and/or students pay for higher education. The credits were designed to incentivize Americans to further their education. There are two higher education credits: The American Opportunity Tax Credit and the Lifetime Learning Tax Credit.
The following criteria must be met to be eligible to claim either tax credit:
- You, your dependent or a third party pays qualified education expenses for higher education.
- An eligible student is enrolled at an eligible education institution.
- The eligible student must be you, your spouse or a dependent listed on your tax return.
The American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum annual credit is $2,500 per eligible student. Should the credit bring the tax you owe to zero, you can have 40% of any remaining amount of the credit, up to $1,000, refunded to you.
Here’s how the calculation of the credit amount works:
- 100% credit for the first $2,000 of qualified education expenses.
- 25% credit of the next $2,000 of qualified education expenses.
To be eligible for an AOTC, the student must:
- Be pursuing a degree or other recognized education credential.
- Be enrolled at least half time for at least one academic period beginning in the tax year.
- Not have finished the first four years of higher education at the beginning of the tax year.
- Not have claimed the AOTC or the former Hope Credit for more than four tax years.
- Not have had a felony drug conviction by the end of the tax year.
In order for you to claim the full credit, your modified adjusted gross income must be $80,000 or less — $160,000 or less if you’re married and filing jointly. You cannot claim the credit if your modified adjusted gross income is more than $90,000, or $180,000 for joint filers.
The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in eligible educational institutions. The credit can help pay for undergraduate, graduate or professional degree courses, including courses to acquire or improve job skills. It’s worth up to $2,000 per tax return.
The amount of your LLC is gradually reduced if your modified adjusted gross income is between $57,000 and $67,000 — $114,000 and $134,000 if you file jointly. You can’t claim the credit if your modified adjusted gross income is $67,000 or more, or $134,000 or more if you file joint returns.
The amount of the credit is 20% of the first $10,000 of qualified education expenses or a maximum of $2,000 per return. The LLC is not refundable. You can use the credit to pay any tax you owe, but you won’t receive any of the credit back as a refund if there is no tax to offset it against.
To claim the AOTC or the LLC, the law requires a taxpayer or dependent to have received Form 1098-T, Tuition Statement, from an eligible education institution, whether domestic or foreign.
Students receive a Form 1098-T from their school by Jan. 31. The statement helps you figure out your credit. The form’s Box 1 shows the amounts received during the year. Make copies of all documents used to discover whether you qualify and to determine the amount of your credit.
Parents and students can learn more about education credits by checking IRS.gov and looking for education resources. There is an IRS Interactive Tax Assistant tool that can help you determine whether you’re eligible for education credits or deductions.< Back to previous page Tax Planning >