Can a Dependent Claim Education Credits?

Higher education costs can be significant, leading many to seek financial relief. Federal education tax credits reduce the amount of tax owed, directly lowering a taxpayer’s liability. These credits support individuals pursuing post-secondary education, recognizing the substantial investment involved. Navigating the rules and determining who can claim these benefits, especially when a student is a dependent, introduces complexity. This article clarifies these intricacies, guiding readers to understand how education credits work and the conditions for claiming them on a tax return.

Understanding Education Credits

The U.S. tax system offers two primary federal education credits to offset higher education costs: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both credits aim to make college more affordable for different educational scenarios.

The AOTC is available for students pursuing their first four years of higher education. This credit provides a maximum benefit of up to $2,500 per eligible student per year. It is calculated as 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000, totaling $2,500.

The Lifetime Learning Credit (LLC) supports individuals in any year of post-secondary education. This includes undergraduate, graduate, professional degree courses, or courses taken to improve job skills. The maximum credit for the LLC is $2,000 per tax return, calculated as 20% of the first $10,000 in qualified education expenses. Both credits are subject to income limitations, meaning taxpayers with incomes above certain thresholds may receive a reduced credit or no credit.

Student and Dependent Eligibility

To claim an education credit, the student must meet specific eligibility requirements. For the American Opportunity Tax Credit, a student must pursue a degree or recognized educational credential. They must also be enrolled at least half-time for one academic period during the tax year. The student cannot have completed the first four years of higher education, nor claimed the AOTC for more than four tax years. Additionally, the student must not have a felony drug conviction by the end of the tax year.

The Lifetime Learning Credit has different student eligibility rules. The student must be enrolled or taking courses at an eligible educational institution. These courses must be for a degree, recognized educational credential, or to acquire or improve job skills. There is no half-time enrollment requirement, and no limit on the number of years the credit can be claimed. For both credits, the educational institution must be eligible to participate in federal student aid programs.

The concept of a “dependent” is important for education credits. For tax purposes, a dependent is either a “qualifying child” or a “qualifying relative.” A qualifying child must meet relationship, age, residency, support, and joint return tests. This includes being under age 19, or under 24 if a full-time student, and providing less than half of their own financial support. A qualifying relative must not be a qualifying child of any taxpayer, have gross income under a certain threshold ($5,050 for 2024, $5,250 for 2025), and receive over half their support from the taxpayer claiming them. If a student meets these criteria, they are a dependent, impacting who can claim education tax benefits.

Determining Who Claims the Education Credit

Only one person can claim an education credit for a specific student in a given tax year. This prevents multiple taxpayers from benefiting from the same educational expenses. Who claims the credit—the student or a parent—primarily depends on the student’s dependent status.

If a student is a qualifying child or qualifying relative dependent, and a parent pays the qualified education expenses, the parent claims the credit. This applies even if the funds originated from the student’s own earnings, as long as the student is properly claimed as a dependent. The IRS views expenses paid by a dependent, or by a third party for that dependent, as if paid by the taxpayer claiming the dependent.

A dependent student can claim the education credit themselves in limited circumstances. This occurs when the student is eligible to be claimed as a dependent by another taxpayer, but that taxpayer chooses not to claim them. If the student pays their own qualified expenses in this situation, they can claim the credit if they meet all other eligibility criteria. This scenario often arises when a student provides more than half of their own support, making them ineligible to be claimed as a dependent by anyone else.

The support test is a factor in determining who claims the credit. If a student provides more than half of their own support, they cannot be claimed as a dependent by another taxpayer. In this case, the student can claim the education credit for their own qualified expenses. If a parent provides more than half of a student’s support, the parent claims the student as a dependent and, consequently, claims the education credit.

Qualified Education Expenses and Documentation

Understanding which expenses qualify for education credits is important for accurate claiming. Qualified education expenses include tuition, fees, and other course-related costs required for enrollment or attendance at an eligible educational institution. For the American Opportunity Tax Credit, qualified expenses also include required course materials like books, supplies, and equipment, even if not purchased directly from the school. Certain expenses are excluded from qualifying for either credit, such as room and board, insurance, medical expenses (including student health fees), transportation, and other personal living expenses.

Form 1098-T, Tuition Statement, is a document issued by eligible educational institutions to students and the IRS. This form reports amounts received for qualified tuition and related expenses, plus scholarships and grants. Box 1 on Form 1098-T reports payments received for qualified tuition and related expenses, while Box 5 shows scholarships or grants. While Form 1098-T is a primary source, it may not include all qualified expenses, such as books and supplies purchased elsewhere for AOTC purposes.

Taxpayers should retain all receipts for qualified expenses not listed on Form 1098-T, such as books and supplies. Maintaining records of payments made to the educational institution is also advisable. These documents serve as substantiation for claimed credit amounts in case of an IRS inquiry.

Claiming the Education Credit on Your Tax Return

Once eligibility for an education credit is determined and qualified expenses are identified, the next step involves reporting these on a federal income tax return. Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), is the primary form used for this purpose. This form guides taxpayers through calculating both the AOTC and the LLC. Information from Form 1098-T and other expense records is transferred to Form 8863 to compute the credit amount.

After calculating the credit on Form 8863, the final amount transfers to Schedule 3 (Form 1040). Schedule 3 reports nonrefundable and refundable credits. The Lifetime Learning Credit is a nonrefundable credit, meaning it can reduce a taxpayer’s liability to zero but will not result in a refund beyond that. The American Opportunity Tax Credit is partially refundable, allowing up to 40% of the credit (up to $1,000) to be received as a refund, even if no tax is owed.

Tax preparation software streamlines this process by guiding users and automatically populating forms. For manual filers, careful attention to Form 8863 instructions ensures accurate reporting. The educational institution’s Employer Identification Number (EIN) is required on Form 8863. Attaching the completed Form 8863 to Form 1040 is necessary for claiming these tax benefits.