Education Tax Credits for College and Job Training
American Opportunity Tax Credit
As part of economic recovery legislation in 2009, Congress enacted the American Opportunity Tax Credit (AOTC). This new credit, now extended through 2017, expands the previous Hope Credit. The AOTC can make education more affordable for many more low-income families and students who might not otherwise be able to attend college. The Lifetime Learning Credit continues to be available to enable individuals to improve their job skills and increase their earning ability. Tax filers who claim an education tax credit may also claim the EIC and Child Tax Credit, if they qualify.
The AOTC is partly refundable. The major change to the previous Hope Credit rules is that up to $1,000 of the AOTC may be claimed even if the individual earns too little to owe income tax.
Who is Eligible to Claim the AOTC?
The AOTC is available for students who are in their first four years of college (the Hope Credit covered only the first two years) and are pursuing an undergraduate degree. Filers may be eligible for the AOTC if they:
- paid for “qualified educational expenses,” whether for themselves, their spouse or their dependents, at an “eligible educational institution,” and
- have adjusted gross income in 2014 less than $80,000; $160,000 if married (these limits are higher than under the Hope Credit rules). The amount of the AOTC phases-out at income levels above this.
- are immigrants who are resident aliens for tax purposes may also claim the AOTC.
Qualified Educational Expenses for the AOTC Include:
- Tuition — the amount of tuition after tax-free contributions have been subtracted, such as:
- Pell Grants
- Veterans Assistance
- Employer Assistance
- Course-related materials, whether or not they are required for enrollment at an educational institution.
- The following are not qualifying expenses:
- Medical expenses
- Room and board
- Other living or family expenses
TIP: When Pell Grants or other scholarships are used to pay tuition, they are considered tax-free income, but those tuition expenses may not be claimed for the AOTC. In some circumstances, it is a greater advantage to allocate the Pell Grant (or other scholarship) toward living expenses. The Grant will then be taxable to the student, but the larger AOTC may more than offset any increase in tax. See, “Coordination with Pell Grants and other scholarships” in IRS Publication 970 “Tax Benefits for Education.”
Eligible Educational Institutions
- Colleges, universities, vocational schools
- Accredited schools eligible to participate in Student Aid programs of the U.S. Department of Education
How Much Is the AOTC Worth?
The AOTC is now worth up to $2,500 — an increase from the Hope Credit’s maximum of $1,800. The AOTC is figured by taking the first $2,000 paid towards the student’s qualified educational expenses, and adding 25 percent of the next $2,000 in educational expenses, up to $2,500.
The AOTC provides a refundable credit worth 40% of this total, up to $1,000. If no income tax is owed, the filer still qualifies for an AOTC up to $1,000. If tax is owed, the balance of the credit is used to reduce the filer’s tax liability.
For example, Maggie earned $25,000 in 2014 and attended college half-time working toward her degree. Her tuition for the year was $5,000. She owes $1,774 in income tax. She qualifies for a maximum AOTC of $2,500 (first $2,000 in expenses + 25% of the next $2,000 in expenses):
- a refundable credit of $1,000 (40% of $2,500) is subtracted from her maximum credit of $2,500, leaving a balance of $1,500 that can also reduce her income tax;
- this reduces her $1,774 income tax to $274.
The Lifetime Learning Credit
For students not pursuing a degree, the Lifetime Learning Credit is available at any point in their post-secondary education. For filers to be eligible for the full credit, adjusted gross income2014 for single or head of household filers must be less than $54,000 or $108,000 if married. (The credit phases out at $63,000.) The credit is 20 percent of the first $10,000 of qualified educational expenses, up to $2,000 per household, regardless of the number of eligible students in the family. Unlike the AOTC, this credit only reduces income tax, and won’t benefit families that owe no tax.
Claiming the AOTC and Lifetime Learning Credits
IRS Form 8863 is required to claim either credit. Form 8863 must be attached to the tax return (Form 1040 or 1040A). For more information see IRS Publication 970 “Tax Benefits for Education.”