Credits related to higher education are some of Americans’ favorite tools for saving money on taxes. These benefits are relatively easy to claim, but the multiple IRS programs can create confusion for taxpayers. There are two separate routes to obtaining tax benefits surrounding educational expenses incurred by taxpayers or their dependents, and each has different qualifications and benefits.
American Opportunity Tax Credit (AOTC)
The American opportunity tax credit is only for those who have not yet completed the first four years of post-secondary education and have not claimed the credit for more than four taxable years. Taxpayers can claim 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 (meaning the credit is capped at $2,500 per student per year). If the tax liability is below zero before or after the credit, up to 40% of the credit is refundable. Qualified expenses include tuition, required fees and course materials such as books and supplies required for enrollment or attendance. Room and board, transportation, insurance and medical expenses do not qualify for the deduction. Modified adjusted gross income (MAGI) limits apply as well; for the 2017 tax year, the credit was unavailable to single filers with MAGI over $90,000 ($180,000 for joint filers). To claim the credit, the eligible student must be pursuing a degree, certificate or other recognized credential in an eligible educational institution for at least one academic period and have no felony drug conviction. Either the student or another taxpayer who claims the student as a dependent can claim the American opportunity credit.
Lifetime Learning Credit (LLC)
The lifetime learning credit is similar to the American opportunity credit but offers the advantage of being available for an unlimited number of years, making it particularly valuable for those who are in school longer than four years and non-degree seeking students who take classes to bolster job skills. The drawback is that the lifetime learning credit is nonrefundable. This credit allows taxpayers to claim 20% of the first $10,000 in qualified educational expenses for the filer or a dependent, for a maximum credit of $2,000. Qualified expenses for the lifetime learning credit are limited to the cost of tuition and fees. While the credit is not affected by a felony drug conviction, it will be unavailable to single filers with MAGI over $66,000 ($132,000 for joint filers).
It is important to note that the same expense cannot be used to claim both AOTC and LLC. Taxpayers may claim both credits for different expenses. For example, Taxpayer A has two children in college and took a course to improve his job skills during the same tax year. Taxpayer A may claim the American opportunity credit for each of his two children and claim a lifetime learning credit for himself. Also, if a student qualifies for both credits, it’s better to claim AOTC because AOTC will likely save you more money.
Determining which of the education-related tax credits is most beneficial can pose a challenge for many filers. However, navigating the maze of legislation to take advantage of one or more of these benefits is a worthwhile endeavor, as it can significantly reduce overall tax liability or even generate income through a refundable credit. If you are paying educational expenses for yourself or a dependent, contacting the tax professionals at HBP is a smart move.
Written by Tian Tian