Do You Get a Tax Credit for Being a Student?

Higher education often involves significant financial commitments, and the tax system provides avenues to help offset these expenses. Education tax credits can reduce a taxpayer’s income tax liability dollar-for-dollar, directly lowering the amount owed. These credits are designed to make higher education more affordable for eligible students and their families. They serve as a means to alleviate some of the financial burdens associated with pursuing postsecondary education.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) supports students during their initial years of higher education. This credit is available for qualified expenses paid for an eligible student during their first four years of postsecondary education. An eligible student must be pursuing a degree or a recognized educational credential and be enrolled at least half-time for at least one academic period during the tax year. Students cannot have completed the first four years of higher education before the tax year began, nor can they have claimed the AOTC for more than four tax years previously. Additionally, students with a felony drug conviction at the end of the tax year are not eligible for this credit.

Qualified education expenses for the AOTC include tuition, fees, and required course materials such as books, supplies, and equipment. These course materials qualify even if they are not purchased directly from the educational institution. Expenses like room and board, transportation, and medical costs do not qualify for the AOTC. The maximum credit available is $2,500 per eligible student each year.

The AOTC calculation involves taking 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of expenses. This credit offers a refundability feature, which means that if the credit reduces the tax liability to zero, 40% of any remaining credit, up to $1,000, can be refunded to the taxpayer.

Eligibility for the AOTC is subject to income limitations based on modified adjusted gross income (MAGI). For single filers, the full credit is available if MAGI is $80,000 or less, with a phase-out range between $80,000 and $90,000. For those married filing jointly, the full credit applies with a MAGI of $160,000 or less, and the phase-out occurs between $160,000 and $180,000. Taxpayers with MAGI exceeding these phase-out ranges cannot claim the AOTC.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) offers a different approach to education tax benefits, accommodating a broader range of educational pursuits. This credit is available for qualified education expenses paid for eligible students enrolled at an eligible educational institution. The student must be taking courses towards a degree or to acquire or improve job skills. There is no requirement for the student to be enrolled half-time, making it suitable for those taking a few courses or pursuing graduate studies.

Qualified education expenses for the LLC include tuition and fees required for enrollment or attendance. Unlike the AOTC, books, supplies, and equipment qualify only if they are required to be purchased directly from the school as a condition of enrollment. Expenses such as room and board are not considered qualified for this credit. The LLC does not have a limit on the number of years it can be claimed, distinguishing it from the AOTC’s four-year limit.

The maximum credit amount for the LLC is $2,000 per tax return, calculated as 20% of the first $10,000 in qualified expenses. The LLC is non-refundable, meaning it can reduce a taxpayer’s liability to zero, but it will not result in a refund if the credit amount exceeds the tax owed.

Income limitations also apply to the LLC. For single filers, the full credit is available with a MAGI up to $80,000, phasing out between $80,000 and $90,000. For married filing jointly, the full credit applies with a MAGI up to $160,000, phasing out between $160,000 and $180,000. Taxpayers with MAGI above these thresholds are not eligible for the LLC.

Claiming Education Tax Credits

Claiming education tax credits involves several practical steps and considerations to ensure proper reporting and maximize benefits. Form 1098-T, Tuition Statement, is a primary document for this process. Eligible educational institutions typically provide this form by January 31st of the following year, reporting qualified tuition and related expenses paid to the institution, assisting taxpayers in determining their eligible credit amount.

Taxpayers should retain records of all qualified education expenses, including those not reported on Form 1098-T, such as expenses for books and supplies under the AOTC. The ability to claim the credit depends on who claims the student as a dependent on a tax return. If parents claim the student as a dependent, only the parents can claim the education credit, regardless of who paid the expenses. If no one claims the student as a dependent, the student may claim the credit on their own tax return.

Taxpayers must choose which education credit to claim, as only one credit can be claimed per student per year. If a student is eligible for both the AOTC and the LLC, it is often more beneficial to claim the AOTC due to its higher maximum credit and partial refundability. To claim these credits, taxpayers must complete IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), and attach it to their federal income tax return, Form 1040.