As the April 15 deadline to file taxes approaches, it’s important for college students and their parents to be aware of education tax credits, which can save families thousands of dollars a year. The American Opportunity Tax Credit and the Lifetime Learning Credit are education tax credits that can be subtracted from your federal income tax bill. They can also lead to a refund.
What is an Education Tax Credit?
Education tax credits are credits, not deductions, meaning they take a bigger chunk out of your tax bill.
A tax credit directly reduces the amount of income tax you owe, while a deduction only reduces your taxable income, which can, but is not guaranteed to, reduce the amount of tax you have to pay.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a temporary tax credit that renamed and modified the Hope educational assistance credit as a result of the 2009 stimulus bill. It has been extended to take effect until the end of 2017. In 2011, it was enhanced to benefit a broader range of taxpayers, including many with higher incomes and those who do not owe any tax.
Also, this tax credit can now be claimed for four years of post-secondary education rather than just two. It also now includes required course materials, including books, equipment and other supplies that do not have to be paid to the educational institution.
Lifetime Learning Credit
The Lifetime Learning Credit is a permanent tax credit, and there is no limit on the number of years it can be claimed for each student. It is available for all years taken to complete a post-secondary education and for courses to acquire or improve job skills. This tax credit is nonrefundable, meaning that if the credit exceeds your taxes paid then the excess will not be refunded to you.
This tax credit includes required student activity fees and costs for course materials such as books, supplies and equipment that must be paid to the institution for enrollment or attendance.
However, the following expenses do not qualify for either the American Opportunity Tax Credit or the Lifetime Learning Credit.
- Room and board
- Transportation fees
- Insurance or medical expenses
- Student fees unless required for admittance
- Expenses already paid for with tax-free educational aid
- Expenses already used for other tax deductions, credit or other educational benefit
Who Qualifies for an Education Tax Credit?
Students only qualify for an education tax credit if they are independent and not claimed by their parents; otherwise their parents must claim the credit. Only one tax credit can be taken each year.
Taxpayers qualify for the American Opportunity Tax Credit if they or their dependents:
- Are enrolled in a post-secondary program leading to a degree, certificate or any recognized post-secondary educational credential.
- Have not completed the first four years of post-secondary education, as of the beginning of the taxable year.
- Are enrolled at least half time for at least one academic period that begins during the tax year.
- Have not been convicted of a felony drug offense.
- Have a modified adjusted gross income that does not exceed $80,000, or $160,000 for joint filers. (The credit is reduced if the taxpayer’s modified adjusted gross income exceeds these amounts. A taxpayer whose modified adjusted gross income is $90,000 or greater, or $180,000 for joint filers, cannot claim the credit.
Taxpayers are eligible for the Lifetime Learning Credit tax credit if they:
- Pay the qualified education expenses of a higher education, not necessarily leading to a degree, a certificate or any recognized post-secondary educational credential.
- Are an eligible student, the spouse of an eligible student or claim an eligible student as a dependent on their tax return.
- Have not been convicted of a felony drug offense.
- Have modified adjusted gross income that is $124,000 or less, or $62,000 or less if single, head of household or qualifying widow(er).
- Are single or married and filing jointly (cannot file separately).
How Much is an Education Tax Credit Worth?
The American Opportunity is a tax credit of up to $2,500 of the cost of tuition, fees and required course materials, including books, equipment and other supplies paid during the taxable year. Also, 40 percent of the credit, up to $1,000, is refundable, meaning you can get money back even if you do not owe any tax.
The Lifetime Learning Credit is a tax credit of up to $2,000 for qualified education expenses paid for all eligible students, and it is nonrefundable.
Kaitlyn Fusco fell in love with writing in elementary school, and that love never abated. She graduated Magna Cum Laude with a journalism degree from the University of Central Florida and is all too experienced in the subject of student loan debt.
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- Bell, K. (2013, March 6). Tax Credits Help With Higher Education. Fox Business. Retrieved from http://www.foxbusiness.com/personal-finance/2013/03/05/tax-credits-help-with-higher-education/
- Internal Revenue Service. (2013, February 11.) Tax Benefits for Education: Information Center. Retrieved from https://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center