Higher Education Tax Credits: Are You Eligible?
Higher Education Tax Credits: Are You Eligible?
As the summer wraps up, students have already or will soon be starting or returning to school! We all know that education is important – and that it is also expensive! There are two tax credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, that can help make up for (some of) the cost of higher education. Both tax credits reduce the amount of tax owed by the taxpayer.
To claim the credits on a tax return, the taxpayer or dependent will receive a Form 1098-T from an eligible educational institution. This is typically received by January 31 of the next tax year.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is for students who are in their first four years at an eligible college or vocational school. Qualified students can receive up to $2,500 each year. This is broken down to 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000 of qualified education expenses, which amounts to $2,500.
If the AOTC brings the amount of taxes owed to zero, the taxpayer will receive 40% of the remaining amount of the credit up to $1,000.
How To Determine Eligibility for the AOTC
Pursuing a degree or other recognized education credential
Enrolled at least half time for at least one academic period of the tax year
First four years of higher education was not finished at the beginning of the tax year
Have not claimed the AOTC for more than four years
Did not receive a felony drug conviction at the end of the tax year
Modified adjusted gross income (MAGI) is within the income limits
For the full credit, MAGI must be less than $80,000 for single filers (or less than $160,000 for joint filers)
For a partial credit, MAGI can be more than $80,000 but less than $90,000 for single filers (or more than $160,000 but less than $180,000 for joint filers)
If MAGI is over $90,000 for single filers or $180,000 for joint filers, you are not eligible for the AOTC
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is available for all years of postsecondary education to help pay for undergraduate, graduate, and professional degree courses to acquire or improve job skills. The LLC is worth up to $2,000 on each tax return, for an unlimited number of years. The credit is 20% of the first $10,000 of qualified education expenses, which amounts to $2,000.
The LLC is used to pay for taxes owed, but unlike the AOTC, the remaining amount cannot be received as a tax refund. For example, if you have $2,000 in qualified education expenses and you owe $1,500 in taxes, the LLC will bring the amount of taxes owed to zero, but you will not receive the extra $500 as a refund.
How To Determine if a Student is Eligible for the LLC
Enrolled or taking courses at an eligible education institution (see below)
Taking at least one higher education course to get a degree, recognized education credential, or to receive or improve job skills
Enrolled for at least one academic period during the tax year
How to Determine if an Education Institution is Eligible
A school that offers higher education beyond high school
A college, university, trade school, or other post-secondary educational institution that is eligible to participate in a student aid program run by the U.S. Department of Education
Typically includes most accredited public, nonprofit, and privately owned for-profit postsecondary institutions
It may be helpful to contact the school itself. You can also check the Database of Accredited Postsecondary Institutions and Programs and/or the list of Federal Student Loan Programs.
How To Determine Overall Eligibility for the LLC
You, your spouse, or your dependent is an eligible student
The eligible student is included on your tax return
You or your dependent pay qualified expenses for higher education
Education expenses paid are for an eligible student enrolled at an eligible education institution
MAGI is within the income limits
For the full credit, MAGI must be less than $59,000 for single filers (or less than $118,000 for joint filers)
The LLC gradually phases out for single filers with a MAGI between $59,000 and $69,000 (or between $118,000 and $138,000 for joint filers)
If MAGI is over $69,000 for single filers (or $138,000 for joint filers), you are not eligible to receive the LLC
Additional Help Determining Eligibility for Higher Education Tax Credits
If you are still unsure about eligibility, we recommend using this Interactive Tax Assistant from the IRS. Before you get started with this tool, you’ll want to gather the following information:
Tax filing status
Student enrollment status
Adjusted gross income (AGI)
Who paid the expenses, when expenses were paid, and the academic period the expenses were incurred
If any expenses were paid with tax-exempt funds
If any expenses were paid with distributions from a Coverdell Education Savings Account or Qualified Tuition Program
Claiming Higher Education Tax Credits
If you have determined that you are eligible and you received Form 1098-T, you can claim the AOTC and/or LLC using Form 8863. It’s important to keep any documents used to determine if you qualify so that you can show them to the IRS if needed.
Questions
The IRS has a helpful chart that compares the AOTC and LLC. Click here to take a look.
As a CPA, my job is to help you get the most out of your tax return and the credits for which you are eligible. You don’t want to miss any tax savings that you can receive from one of the higher education tax credits. I am happy to help with your tax-related questions! Just send an email to joycegcpa@gmail.com!