What Are Education Tax Credits and How Do They Work?

Education tax credits help manage higher education costs. These credits directly reduce the amount of income tax owed, offering a dollar-for-dollar reduction of tax liability. In certain situations, some credits can even lead to a tax refund.

Types of Education Tax Credits

The U.S. federal government offers two primary education tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Taxpayers cannot claim both credits for the same student in the same tax year.

The American Opportunity Tax Credit is for eligible students during their first four years of higher education. It offers a maximum annual credit of $2,500 per eligible student. This credit is calculated as 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of expenses. The AOTC is partially refundable; if the credit reduces a taxpayer’s liability to zero, up to 40% of the remaining credit, with a maximum of $1,000, may be refunded.

The Lifetime Learning Credit is broader in scope, supporting undergraduate, graduate, and professional degree courses, including those taken to acquire or improve job skills. There is no limit on the number of years this credit can be claimed. The LLC offers a maximum credit of $2,000 per tax return, calculated as 20% of the first $10,000 in qualified education expenses. The Lifetime Learning Credit is non-refundable, meaning it can only reduce the tax owed to zero.

Eligibility and Qualified Expenses

Eligibility for education tax credits involves specific criteria for the student and the taxpayer. Qualified education expenses must be for an eligible student enrolled at an eligible educational institution. An eligible institution generally includes accredited colleges, universities, and vocational schools that can participate in U.S. Department of Education student aid programs.

American Opportunity Tax Credit Student Eligibility

For the AOTC, the student must be pursuing a degree or other recognized educational credential. They need to be enrolled at least half-time for at least one academic period. The student must not have completed the first four years of higher education, nor claimed the AOTC or former Hope Credit for more than four tax years. The student must also not have a felony drug conviction.

Lifetime Learning Credit Student Eligibility

The Lifetime Learning Credit has more flexible student eligibility. The student must be enrolled or taking courses at an eligible educational institution to obtain a degree or improve job skills. There is no requirement for the student to be enrolled at least half-time; taking even a single course can qualify. There is no limit on the number of years the LLC can be claimed, nor is it restricted to the first four years of post-secondary education.

Taxpayer Eligibility

The individual claiming the credit must be paying qualified education expenses for themselves, their spouse, or a dependent. If a student is claimed as a dependent on someone else’s tax return, that student cannot claim the education credit themselves. Taxpayers filing as married filing separately are generally ineligible for both credits.

Qualified Expenses

Qualified education expenses for the AOTC include tuition, required fees for enrollment or attendance, and expenses for books, supplies, and equipment needed for a course of study, even if not purchased directly from the educational institution. For the LLC, qualified expenses include tuition and fees required for enrollment or attendance, and course materials, but only if they are mandatory and paid directly to the institution. Expenses that do not qualify for either credit include room and board, insurance, medical expenses, transportation, and similar personal living expenses, even if paid to the institution.

Calculating and Claiming the Credit

Both credits are subject to Modified Adjusted Gross Income (MAGI) phase-out rules. For the 2024 tax year, the full credit for both is available to taxpayers with a MAGI of $80,000 or less for single filers and $160,000 or less for those married filing jointly. The credit gradually phases out for single filers with MAGI between $80,000 and $90,000, and for married couples filing jointly with MAGI between $160,000 and $180,000. If MAGI exceeds these upper thresholds, neither credit can be claimed.

The American Opportunity Tax Credit is calculated as 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified expenses, for a maximum credit of $2,500 per eligible student. For example, if a student has $4,000 in qualified expenses, the credit would be $2,000 (100% of the first $2,000) plus $500 (25% of the next $2,000), totaling $2,500. The Lifetime Learning Credit is calculated as 20% of the first $10,000 of qualified education expenses, resulting in a maximum credit of $2,000 per tax return. If $5,000 in eligible expenses are incurred, the credit would be $1,000.

To claim either education credit, taxpayers must generally have received Form 1098-T, Tuition Statement, from an eligible educational institution. This form reports amounts received by the school, though the amount may not always be the exact amount that qualifies for the credit. Taxpayers should retain receipts and records for all qualified expenses, especially for items like books and supplies for the AOTC, which may not be reflected on Form 1098-T but are eligible.

To claim these credits, complete IRS Form 8863, Education Credits, and attach it to your federal tax return. The school’s Employer Identification Number (EIN) must be included on Form 8863, particularly for the AOTC.