Who Can Claim an Education Tax Credit?
Navigate education tax credit eligibility. Learn who can claim these benefits, which expenses are covered, and the necessary steps to reduce your tax burden.
Education tax credits reduce the financial burden of higher education. These credits directly lower the amount of tax owed, providing a dollar-for-dollar reduction of tax liability. They help taxpayers manage costs for college, graduate school, or vocational training for themselves, a spouse, or a dependent.
American Opportunity Tax Credit Eligibility
The American Opportunity Tax Credit (AOTC) is for qualified education expenses during the first four years of postsecondary education. The student must pursue a degree or recognized educational credential and be enrolled at least half-time for one academic period. The student must not have completed the first four years of higher education, nor claimed the AOTC or Hope Credit for more than four tax years. A student with a felony drug conviction is ineligible.
Qualified expenses for the AOTC include tuition, required fees, and course materials like books and supplies. These materials do not need to be purchased directly from the institution. Room, board, transportation, and medical insurance are not qualified expenses.
The maximum AOTC is $2,500 per eligible student annually, based on 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses. The credit phases out for single taxpayers with a modified adjusted gross income (MAGI) between $80,000 and $90,000, and for those married filing jointly with MAGI between $160,000 and $180,000. The credit cannot be claimed if MAGI exceeds $90,000 for single filers or $180,000 for joint filers.
Lifetime Learning Credit Eligibility
The Lifetime Learning Credit (LLC) covers qualified education expenses for undergraduate, graduate, and professional degree courses, including those for job skills. Unlike the AOTC, there is no degree or half-time enrollment requirement. The student must be enrolled or taking courses at an eligible educational institution for at least one academic period.
Eligible expenses for the LLC include tuition and fees. Equipment and supplies are also eligible if paid directly to the school. Room, board, transportation, and most books not purchased from the institution are not qualified expenses.
The maximum LLC is $2,000 per tax return, not per student, calculated as 20% of the first $10,000 of qualified education expenses. The LLC is a non-refundable credit, meaning it can reduce tax liability to zero but not result in a refund.
General Eligibility Requirements and Limitations
General rules apply to both the American Opportunity Tax Credit and the Lifetime Learning Credit. The student must have a valid Taxpayer Identification Number (TIN), such as a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN), by the tax return’s due date. This ensures proper identification for tax purposes.
Only one education credit can be claimed per student per year. Education expenses used for a credit cannot also be used to claim other tax benefits, such as a tuition and fees deduction. This prevents claiming multiple tax advantages for the same expenses.
Tax-free educational assistance, such as scholarships and grants, reduces the qualified expenses eligible for these credits. However, if a scholarship or grant is taxable because it was used for non-qualified expenses like room and board, it does not reduce the qualified expenses for the credit.
Both credits are subject to income limitations. They phase out for single taxpayers with a modified adjusted gross income (MAGI) between $80,000 and $90,000, and for those married filing jointly with MAGI between $160,000 and $180,000. The credits cannot be claimed if MAGI exceeds $90,000 for single filers or $180,000 for joint filers.
Information Needed to Claim Education Credits
To claim education tax credits, taxpayers need specific documentation. The primary document is Form 1098-T, Tuition Statement, provided by educational institutions by January 31st each year. This form reports amounts billed or received for qualified tuition and related expenses.
Form 1098-T may not reflect all qualified expenses. Taxpayers should retain additional records for expenses not reported on Form 1098-T, such as receipts for eligible course materials like books and supplies.
Accurate student information, including name, address, and SSN or ITIN, is needed. Documentation proving enrollment status, such as half-time enrollment and academic periods, is also necessary. Records of tax-free scholarships, grants, or other educational assistance should be kept, as these affect credit calculation.
How to Claim Education Credits
Once eligibility is confirmed and all necessary information is collected, education credits are claimed on federal income tax returns. Taxpayers use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to calculate the credit amount.
After completing Form 8863, the credit amount is reported on Schedule 3 of Form 1040. Form 8863 must be attached to the tax return.