Taxpayers who pay for tuition or expenses for higher education may be eligible for one of two education tax credits — the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). If you claim your child as a dependent, you can claim the education tax credit for that child. To be eligible to claim the AOTC or the LLC, the taxpayer (or a dependent) should have received Form 1098-T, Tuition Statement, from an eligible educational institution.
Qualifying Expenses
Qualified tuition and related expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions, including colleges, universities and trade schools. The expenses paid during the tax year must be for an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year.
The following are not qualified expenses the AOTC or the LLC:
• Room and board
• Transportation
• Insurance
• Medical expenses
• Student fees, unless required as a condition of enrollment or attendance
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is available to eligible students for the first four years of higher education, with several requirements for the student:
• Must be pursuing a degree or other recognized credential
• Must be enrolled at least half-time for at least one academic period or semester
• Must not have received the AOTC or the Hope credit for more than the past four years
• Must not have a felony drug conviction at the end of the tax year.
For the 2024 tax year, students may receive up to $2,500 of credit for the AOTC. The credit is refundable up to 40%. The credit is awarded for 100% of the first $2,000 of qualified educational expenses and 25% of the next $2,000. For example, if a student pays $4,000 in educational expenses, they will receive the full $2,500.
To prove eligibility, the student must receive a Form 1098-T from their educational institution or be able to substantiate payment to an institution that was not required to provide this form. To receive the full AOTC, the taxpayer’s Adjusted Gross Income (AGI) must be $80,000 or less, or $160,000 or less for a married couple filing jointly. If the AGI is above those limits, taxpayers may be eligible for a reduced credit.
Qualified tuition and related expenses for the AOTC include amounts paid for books, supplies and equipment needed for a course of study. The materials do not have to be bought from the eligible educational institution. Purchase of a computer can qualify for the credit if the computer is necessary for attendance at the educational institution.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) provides to $2,000 in tax credit. It is generally more flexible than the AOCT, since there is no limit on the number of years it can be claimed and the eligibility requirements are less stringent. The Lifetime Learning Credit is not limited to your first four years of undergraduate study. It can be applied for graduate school or courses taken to acquire or improve job skills without pursuing a degree.
Like the AOTC, the LLC is for qualified tuition and expenses paid to qualified institutions in the United States, including colleges, technical schools and universities offering education beyond high school. Unlike the AOTC, the LLC requires any qualified related expenses to be paid directly to the school.
Similar to the AOTC, the student should have received a 1098-T tuition statement from the higher education institution. The credit is worth up to 20% of the first $10,000 that a taxpayer spends at a higher education institution, for a maximum of $2,000.
For example, if a taxpayer started school at a university in the fall semester and tuition cost was $10,000 or more, that taxpayer could be eligible for a credit of $2,000. The LLC is not refundable and can only be applied against tax balances due.
To qualify for the full credit in 2023, a taxpayer’s income must have been no more than $80,000 for single filers or $160,000 for joint filers. Beyond those limits, the credit is gradually phased out.
Claiming Your Education Credits
IRS Form 8863 is used to calculate both the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, including the refundable portion of the AOTC. You cannot claim both credits in the same year for the same student, but you can claim both credits in the same year for different students. The combined total of nonrefundable credits is reported on your Form 1040, US Individual Tax Return.
Scholarships
The Form 1098-T also reports any scholarship amounts received. Taxpayers must subtract the scholarship amount from the tuition paid amount and then claim a credit for the remaining tuition on their tax return. The IRS considers scholarship amounts that exceed tuition and related expenses as income.
Your CPA or tax advisor will be helpful in maximizing the credit by determining if the AOC or the LLC is the more beneficial credit, and by optimizing the scholarship and grant allocation between qualified and nonqualified expenses.
