Article Highlights:
- Overview
- Eligible Education Expenses
- Credit Qualifications
- American Opportunity Credit
- Lifetime Learning Credit
- Qualifications
- Who Gets the Credit
If you think that education credits are just for sending your children to college, think again; the credits are available to you, your spouse (if you are married), and your dependents. Even if you or your spouse only attend school part time, you still may qualify for a tax credit.
There are two education-related tax credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary postsecondary institution that can participate in the U.S. Department of Education’s student aid programs.
The credits phase out for higher-income taxpayers who are married filing jointly (MFJ) or who are unmarried. Those who are married filing separately (MFS) do not qualify for either credit.
Eligible Expenses – The following table defines the eligible and ineligible expenses that are used in determining the education expenses. This table illustrates the differences between expenses that qualify for the AOTC and the LLC.
ELIGIBLE EDUCATION EXPENSES | |||
EXPENSE | NOTES | AOTC | LLC |
| Computer | If needed for attendance at the educational institution. | See Notes | No |
| Computer Software | If needed for attendance at the educational institution. Sports, games, hobbies only if educational in nature. | See Notes | No |
| Course Materials and Supplies | For the LLC only if purchased from the institution as a condition of attendance. | Yes | See Notes |
| Equipment | Required for enrollment or attendance. | Yes | No |
| Fees | Required for enrollment or attendance. | Yes | Yes |
| Fees, Non-Academic | Only if they are required to attend. | Yes | Yes |
| Fees, Student Activity | Paid to the educational institution. | Yes | Yes |
| Internet Service | If needed for attendance at the educational institution. | Yes | No |
| Travel Expenses | – | No | No |
| Tuition: Higher Education | – | Yes | Yes |
| Tuition: Hobby, sports, games, non-credit courses. | If part of student’s degree program for AOTC and LLC. For LLC if required to acquire or improve job skills. | See Notes | See Notes |
Credit Qualifications – There are differences in the qualifications for each credit as illustrated in the following table.
CREDIT QUALIFICATIONS & AMOUNTS | ||
QUALIFICATIONS & AMOUNTS | AOTC | LLC |
| Allowance Period | First 4 years of postsecondary education | Any postsecondary education for any number of years |
| Enrollment | Must be considered at least a half-time student by the educational institution | Not required to be enrolled at least half-time |
| Program Type | Must be pursuing a program leading to a degree or another recognized educational credential | Not required to be enrolled for the purpose of obtaining a degree or other credential |
| Credit Applied | Per student | Per family |
| Credit Amount | 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses | 20% of up to $10,000 in qualified expenses |
| Qualified Expenses | Qualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendance | Qualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution |
| High Income Phase-out. Based upon filing status and adjusted gross income. | Married Filing Joint: $160,000 to $180,000 | Married Filing Joint: $160,000 to $180,000 Married Filing Separate: No credit allowed. Unmarried: $80,000 to $90,000 |
| Refundable* | Partially; 40% of the credit is treated as refundable | No |
*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.
Many individuals who both work and attend school can be enrolled less than halftime and still qualify for the LLC.
Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses. Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education; the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.
Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent); this includes the information necessary to complete the IRS form and claim the credit. Unless the IRS has exempted the educational institution from having to file a 1098-T, the law requires the taxpayer to have this 1098-T in hand to claim either of the credits. In the latter case, the taxpayer will need to be able to document the student’s enrollment at an eligible educational institution, and substantiate the amount of any scholarships received and the tuition payment(s) made and related expenses.
If you have questions about how these education tax credit provisions apply to you, please give this office a call.