Top 2 Education Tax Credits for Individuals

8 minute read

Anyone who has attended (or paid for) college in this century knows it’s expensive. As you tally up the cost of a college education, keep good records so you can receive some much-needed relief on your annual income tax return. We dive into the details on two tax credits for education — the American opportunity tax credit and the lifetime learning credit — that can help provide tax breaks for higher education expenses.

American Opportunity Tax Credit

The American opportunity tax credit (AOTC) is a partially refundable annual tax credit of up to $2,500 per student for qualified education expenses incurred during their first four years of postsecondary education. If your tax liability is zero, the refundable portion of the AOTC is $1,000, and any unused credit cannot be carried forward to the next year.

You can claim the AOTC for yourself (if you are a student) and/or on behalf of your dependents if you paid to support them through school.

To obtain the maximum annual credit, two things must happen:

  1. You must spend at least $4K on qualified education expenses. Your credit will be 100% of the first $2K spent and 25% of the next $2K spent.
  2. Your modified adjusted gross income (MAGI) must be less than the limits imposed by the IRS. If your MAGI is above certain thresholds, your credit will be reduced or will be phased out altogether.
To receive the full credit, your MAGI must be:Your credit will be reduced if your MAGI is:Your credit will be fully phased out if your MAGI is:
Single/Head of Household (HH)<$80K$80K–$90K>$90K
Married Filing Jointly
Married Filing Separately (MFS)N/A – married taxpayers who file separately are
not eligible for the education credit
N/A – married taxpayers who file separately are
not eligible for the education credit
N/A – married taxpayers who file separately are
not eligible for the education credit

You can use the student’s Form 1098-T, Tuition Statement, to support your claim, but some non-tuition education costs can also qualify for the AOTC. Here’s a list that can help:

AOTC Qualifying ExpensesAOTC Nonqualifying Expenses
TuitionLiving expenses
Required books, supplies and equipmentExpenses deducted elsewhere on your return (like for business expenses)
Prepaid expenses for an educational program that begins within the first three months of the following yearSports, hobbies and noncredit courses (unless part of the degree program)
Qualified expenses that were not refunded (like in the case of a class withdrawal)Tax-free educational assistance (e.g., scholarships, grants, employer assistance programs)
Student activity fees required as part of enrollment and attendanceTax-free distributions from a Coverdell education savings account or Section 529 plan

Other requirements to qualify for the AOTC include the following:

  • The student must have been enrolled at least half-time at an eligible educational institution during the academic period. An eligible education institution is any college, university or trade school that is eligible to participate in the Federal Student Loan program by the US Department of Education.
  • The student must not have finished the first four years of higher education, or they cannot have already claimed the AOTC (or the HOPE credit, as it was known in the past) for more than four tax years.
  • The student must have a valid taxpayer identification number (SSN or, in rare circumstances, an ITIN used by resident aliens).
  • The student can have no felony drug convictions at the end of the tax year.

The AOTC is calculated per student — meaning, if your MAGI is less than the income limit, each taxpayer and dependent with eligible educational expenses can apply for the credit.

To apply for the AOTC, complete Form 8863, Education Credits. This is the same tax form you will use if applying for the Lifetime Learning Credit, discussed next.

Lifetime Learning Credit

There is no restriction on the number of years you can claim the lifetime learning credit (LLC) — after all, it is called the lifetime learning credit.

The LLC is a credit of up to $2K per tax return (not per student). Even if taxpayer, spouse and dependents are all enrolled in postsecondary education, the aggregate value of the credit cannot exceed $2K. And, because the credit is nonrefundable, the LLC can reduce your liability to zero but not below.

The credit is calculated based on 20% of qualified expenses. Therefore, the maximum credit of $2K is only attainable if you spend at least $10K on qualified educational expenses. The LLC is phased out for high earners using the same MAGI phase-out rules as the AOTC.

A few contrasting education expenses exist when applying for the LLC over AOTC. On the upside, noncredit courses for career development (such as to learn or improve a new job skill) are qualified expenses under the LLC; you do not need to be in pursuit of a degree or certification for the program or course to be recognized as qualified. Also, because the LLC is allowed for non-degree career development courses, you do not need to meet the requirement of being enrolled at least half-time at an educational institution. However, books and other course material are not qualified for LLC even if they’re required for the course program.

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Should I Take the AOTC or the LLC?

Almost all taxpayers should prioritize the AOTC over the LLC. Here’s why:

  1. The AOTC has a higher maximum credit ($2,500 vs. $2,000).
  2. The AOTC requires you to spend less to receive the maximum credit. A portion of the AOTC is a dollar-for-dollar credit, while the LLC provides only 20 cents in credit for every dollar spent on education.
  3. The AOTC is partially refundable while the LLC is not.
  4. The AOTC can only be taken during the student’s first four years of higher education. Don’t let those four years of expenses be wasted on a lesser credit.
  5. The AOTC can be used when multiple people are in school at once, which can benefit families that have more than one taxpayer or dependent attending college.

Only after you’ve exhausted the AOTC should you consider the LLC.

The following chart helps summarize the differences between the AOTC and LLC.

American Opportunity Tax CreditLifetime Learning Credit
Maximum Credit$2.5K per student
100% on first $2K
25% on next $2K
$2K per return
20% on first $10K
$1K refundableNonrefundable
Eligible ExpensesTuition, fees and required course materials for accredited programsTuition and fees for both credit and non-credit courses
Credit Phase-OutsSingle/HH ($80K–$90K)
MFJ ($160K–$180K)
MFS not eligible
Single/HH ($80K–$90K)
MFJ ($160K–$180K)
MFS not eligible
Years Allowed for CreditFirst four years of higher educationUnlimited

Other Education Savings Opportunities

Tax credits are a great benefit to take advantage of while enrolled in an educational program, but what about planning before college? And how might you mend the hole in your wallet while paying back loans? Here are a few options to consider:

Student loan interest deduction. While making payments on a qualified student loan, you may be able to write off education expenses by taking a deduction on your tax return up to $2,500 for interest paid during the year.

Education savings account (ESA). Coverdell ESA contributions are not deductible, but deposits grow tax free, and distributions are also tax free if used to pay qualified education expenses at an eligible institution.

529 plan. Like Coverdell ESAs, 529 plans help you pay for education costs with pretax dollars.

ABLE account. ABLE accounts can help taxpayers pay for qualified disability expenses, including the cost of attending college.

Scholarships. With some hard work and a bit of luck, you or your dependents may receive a scholarship that can be used for tuition payments. Student scholarships are exempt from taxation if they are used for tuition.

Tuition and fees deduction (now repealed). The Consolidated Appropriations Act (CAA) repealed the tuition and fees deduction beginning with tax year 2021. For years 2017, 2018, 2019 and 2020, the deduction could be used to reduce adjusted gross income by up to $4K.

Education Credit Tax Planning

Focus on achieving an education and rely on Corvee for tax planning. When more than one student has postsecondary educational expenses, it is possible to claim both the LLC and AOTC on the same tax return. Corvee tax planning software will determine how to achieve the maximum benefit for you, your spouse and your dependents in any scenario.

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