The federal government has set up education credits to help Americans who seek higher education. These credits consider “qualified higher education expenses” such as tuition and course fees. Boarding, meal, transportation, and other fees do not qualify as a credit expense. Additionally, money paid for a course which doesn’t apply credit to the degree sought by the student, such as those involving sports or hobbies, don’t count toward either education credit. Any expenses reimbursed by an employer, scholarship or fellowship, distributions from an Educational IRA, courses classified as a business expense, or interest from a series “EE” US Savings Bond are also excluded.
If you’ve had your expenses paid through a gift from a private person, those monies will qualify, as long as they are for courses that begun in the same year as which the money was paid (or within the first three months of the new tax years).
Only expenses paid for the taxpayer claiming the credit, their spouse, or their dependent will qualify. If you are a dependent, and you are filing a tax form, you can’t claim the credit. Instead, the person who claims you as a dependent is eligible to receive the credit, regardless of who paid.
The Difference between the Credits
The American Opportunity Credit applies to the first four years of higher education, while the Lifetime Learning Credit extends to grad school and even for learning opportunities that don’t result in a degree or certificate.
The AOC requires students to be enrolled at least half time under the rules of the school, and the study results in a degree or certification. The Lifetime Learning Credit does not apply the same limitations, as elective courses to strengthen career skills can qualify.
The AOC applies per student, whereas the LLC applies per taxpayer
The American Opportunity Credit
100% of the first $2,000 in qualifying education expenses, as well as 25% of the next $2,000 in expenses are covered by the credit. The limit on the American Opportunity Credit is a maximum of $2,500 on $4,000 in qualifying costs.
The American Opportunity Credit is refundable up to 40%, which equals $1,000 that may be given to you, even if you have no tax liability.
The Lifetime Learning Credit offers a 20% credit on the first $10,000 of qualified expenses.