Paying for educational expenses isn’t easy. At tax time, there are certain educational tax credits that can help offset some higher education costs by lowering the tax liability of households with eligible students. There are even some circumstances where one may be eligible for a tax refund.
The two major education tax credits are:
- American Opportunity Tax Credit (AOTC): Enacted by Congress in 2009, this credit is part of economic recovery legislation and is available through 2017. It is an extension of the previous Hope Credit, and can help lower-income individuals afford higher education, and makes college accessible to those who may not have otherwise been able to
- Lifetime Learning Credit (LLC): This credit is extended to students in any point of their post-secondary educational journey, regardless of whether they are pursuing a degree. This credit can be used for workers to improve their skills and increase their potential for higher income. This credit reduces income tax, so it doesn’t benefit those who do not owe any tax, unlike the AOTC.
Both credits have similar requirements to claim either one. Taxpayers may meet eligibility if the following are true:
- Qualifying education expenses were paid during either the tax year or the first three months of the following tax year. These expenses must be paid for either themselves, their dependents or their spouse, and must be incurred at an “eligible educations institution”, such as a college, university, vocational school, or an accredited school that is eligible to participate in the Department of Education Student Aid program.
- The student meets the enrollment qualifications of at least one academic period beginning in the tax year. Academic periods are defined as semesters, quarters, or another period for study as relative to the school. Students must be enrolled at minimum part-time to claim the AOTC, while the LLC requires students to be enrolled in at least one course.
- The student must be pursuing a degree or academic credential. In the case of the LLC, acquisition or advancement of job skills meets this qualification.
The American Opportunity Tax Credit has more requirements in addition to the general eligibility credentials. Students:
- Must not have claimed any educational tax credits for four consecutive tax years
- Must be a citizen or resident alien for tax purposes
- Can’t have a felony drug conviction
- Can’t be married filing separately
- Can’t be listed as a dependent on another taxpayer’s return
Whether you are claiming the American Opportunity Tax Credit or the Lifetime Learning Credit, there are certain expenses which are eligible:
- Tuition amounts after any tax-free contributions, including scholarships, fellowships, Pell Grants, Veteran’s Assistance, and employer assistance
- Fees and enrollment expenses
- Supplies, books, and course materials, regardless of where they are purchased (AOTC only)
- Materials for non-credit courses if they directly improve job function and skill set (LLC only)
Education is expensive. There are some costs you may incur that aren’t covered by the educational credits, including the following:
- Medical expenses
- Room and board
- Other living or family expenses
- Child care
Note that books and supplies are only qualified expenses in relation to the American Opportunity Tax Credit, but not the Lifetime Learning Credit. The opposite is true for supplies relating to non-credit courses that improve job skills.
Students should determine how to use certain benefits to maximize their advantages. For example, a scholarship or Pell Grant that is used to cover tuition expenses is considered tax-free, but then the tuition expense cannot be used to claim the AOTC. However, if the student applies the grant to their living expenses instead, in some cases, it may be more beneficial. This is because the AOTC may offset any increase in taxes, since the grant will be taxed.
The maximum amount of the AOTC is $2,500, which is calculated by the first $2,000 paid in qualified expenses plus 25% of the next $2,000, capping at $2,500.
Of that amount, up to $1,000 is refundable, regardless of whether the taxpayer owes income tax. Otherwise, the balance of the credit reduces the tax liability.
The Lifetime Learning Credit is non-refundable, and is equal to 20% of the first $10,000 in qualified expenses. The credit is capped at $2,000 per household, no matter how many students are in the family.