Education tax credits help decrease the costs of higher education by reducing the amount of taxes households with eligible students owe. In some cases, filers can even qualify for tax refunds.
AMERICAN OPPORTUNITY TAX CREDIT
The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the American Opportunity Tax Credit (AOTC) permanent. This credit expands the previous Hope Credit and can make education more affordable for lower-income families and students who might not otherwise be able to attend college.
LIFETIME LEARNING CREDIT
For students not pursuing a degree, the Lifetime Learning Credit (LLC) is available at any point in their post-secondary education. Workers may use the LLC to improve job skills which can increase their earning ability. Unlike the AOTC, this credit only reduces income tax, and won’t benefit filers that do not owe tax.
Filers may be eligible for the education tax credits if:
- They paid for “qualified educational expenses,” during the tax year or the first three months of the next year for themselves, their spouse, or their dependents, at an “eligible educational institution.” These institutions include colleges, universities, vocational schools, and accredited schools eligible to participate in Student Aid programs of the U.S. Department of Education.
- The student is enrolled for at least one academic period beginning in the tax year. Academic periods can be semesters, quarters, or any other period of study as defined by the school. For the AOTC, students must be enrolled at least part-time, whereas for the LLC, students must be enrolled in at least one course.
- The student is pursuing a program leading to a degree or another recognized education credential. For the LLC, students may also be working to acquire or improve job skills.
- They have modified adjusted gross income in 2017 less than the following amounts:
|Credit||Single Filers||Married Filers|
|American Opportunity Tax Credit||$80,000||$160,000|
|Lifetime Learning Credit||$65,000||$131,000|
The following additional requirements apply for the American Opportunity Tax Credit.
- They have not claimed any education tax credits for four prior tax years.
- They are immigrants who are resident aliens for tax purposes
- The student’s record does not have a felony drug conviction
Filers who are married filing separately or who are listed as a dependent on another filer’s tax return are ineligible to claim the AOTC.
QUALIFIED EDUCATION EXPENSES
Qualified educational expenses include:
|American Opportunity Tax Credit||Lifetime Learning Credit|
The following do not count as qualified educational expenses:
- Medical expenses
- Room and board
- Other living or family expenses
- Child care
OF NOTE: Books, supplies, and course-related materials count as qualified educational expenses for the American Opportunity Tax Credit, but not the Lifetime Learning Credit. Materials for sports, hobbies, or non-credit courses (that directly help improve job skills) count as educational expenses for the Lifetime Learning Credit but not the American Opportunity Tax Credit.
Tip: Students can decide how to allocate their education expenses so that it’s most advantageous to them. 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” or the Pell Grants and Tax Credits Fact Sheet.
American Opportunity Tax Credit
The AOTC is 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.
Up to $1,000 (or 40 percent of the total credit) is refundable even if a filer doesn’t owe income tax. 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 2017 and attended college half-time working toward her degree. Her tuition for the year was $5,000. She owes $1,724 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):
- Maggie qualifies for a refundable credit of $1,000 (40% of $2,500), which is subtracted from her maximum credit of $2,500, leaving a balance of $1,500. This remaining credit reduces her $1,724 income tax to $224.
Lifetime Learning Credit
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 is non-refundable.
CLAIMING THE CREDITS
To claim either tax credit, filers must submit Form 8863, “Education Credits” with their Form 1040 or Form 1040A.
Students usually receive a Form 1098-T, “Tuition Statement” from their institution by January 31st of the following year. This form is used to help determine the amount of qualified educational expenses that filers can claim.
For more information, see IRS Publication 970 “Tax Benefits for Education.”