How to Claim Your Education Credits (AOTC & LLC)

Education expenses can be substantial, but federal tax credits offer a way to reduce the financial burden of higher education. These credits directly lower the amount of tax owed, providing a dollar-for-dollar reduction rather than just a deduction from taxable income. The two most widely utilized federal education credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

American Opportunity Tax Credit Eligibility and Benefits

The American Opportunity Tax Credit (AOTC) is available for qualified education expenses paid for an eligible student during their first four years of higher education. To qualify, a student must be pursuing a degree or other recognized educational credential and be enrolled at least half-time for at least one academic period during the tax year. The AOTC can be claimed for a maximum of four tax years per eligible student.

Qualified education expenses for the AOTC include tuition, mandatory school fees, and course-related books, supplies, and equipment, regardless of whether these items are purchased directly from the institution. Expenses such as room and board, insurance, medical expenses, and transportation costs do not qualify. The maximum credit available is $2,500 per eligible student. This amount is calculated as 100% of the first $2,000 in qualified expenses and 25% of the next $2,000 in qualified expenses.

A notable feature of the AOTC is its partial refundability. If the credit reduces a taxpayer’s owed tax to zero, up to 40% of any remaining credit, or a maximum of $1,000, may be refunded. Eligibility for the full credit begins to phase out for single filers with a modified adjusted gross income (MAGI) between $80,000 and $90,000, and for married couples filing jointly with a MAGI between $160,000 and $180,000. Taxpayers with MAGI above these limits cannot claim the AOTC.

Lifetime Learning Credit Eligibility and Benefits

The Lifetime Learning Credit (LLC) supports a broader range of educational pursuits, including undergraduate, graduate, and professional degree courses, as well as courses taken to acquire or improve job skills. Unlike the AOTC, there is no limit on the number of years the LLC can be claimed. To qualify, a student must be enrolled or taking courses at an eligible educational institution for at least one academic period during the tax year. The student does not need to be pursuing a degree or be enrolled half-time; taking even a single course can qualify.

Qualified education expenses for the LLC include tuition and fees required for enrollment or attendance. Course-related books, supplies, and equipment are also qualified expenses if their purchase is a condition of enrollment or attendance. Similar to the AOTC, expenses like room and board, transportation, and other personal living costs are not eligible. The maximum LLC is $2,000 per tax return, not per student. This credit is calculated as 20% of the first $10,000 of qualified education expenses.

The Lifetime Learning Credit is non-refundable, meaning it can reduce a taxpayer’s tax liability to zero, but any remaining credit will not be issued as a refund. Income limitations also apply to the LLC. For the 2024 tax year, the credit phases out for single filers with a MAGI between $80,000 and $90,000. For married couples filing jointly, the phase-out range is between $160,000 and $180,000. Taxpayers with MAGI above these thresholds cannot claim the credit.

Claiming Your Education Credits

To claim education credits, taxpayers begin with information provided on Form 1098-T, “Tuition Statement.” This form is issued by eligible educational institutions and reports amounts paid for qualified tuition and related expenses. Form 1098-T may not include all qualified expenses, such as the cost of books and supplies not purchased directly from the school, which taxpayers must track separately.

The calculation and reporting of education credits are done on Form 8863, “Education Credits (American Opportunity and Lifetime Learning Credits).” Taxpayers use the information from their Form 1098-T and their own records of qualified expenses to complete this form. Form 8863 guides the taxpayer through determining the eligible expenses and calculating the credit amount based on the specific rules for either the AOTC or the LLC.

Once Form 8863 is completed, the calculated education credit amount is then transferred to Schedule 3 (Additional Credits and Payments) of Form 1040. While receiving Form 1098-T is required to claim these credits, a credit may still be claimed without it if the institution is not required to provide one, or if it was not received, provided the taxpayer can substantiate enrollment and payment of qualified expenses.

Essential Documentation for Education Credits

Maintaining thorough records is important when claiming education credits, as these documents substantiate the claims in case of an IRS inquiry or audit. The primary document received from an educational institution is Form 1098-T, “Tuition Statement,” which details qualified tuition and related expenses.

Beyond Form 1098-T, taxpayers should retain all receipts for qualified expenses not reported on the statement, such as books, supplies, and equipment that were required for enrollment or attendance. Proof of enrollment, such as registration statements or academic transcripts showing course load, should also be kept. Records of payment, including cancelled checks, bank statements, or credit card statements, are important to verify that expenses were indeed paid.

Any correspondence from the educational institution related to billing or enrollment should also be retained. Tax records, including supporting documentation for education credits, are generally recommended to be kept for at least three years from the date the tax return was filed or the tax was paid, whichever is later.