An education tax credit is a tax benefit available to taxpayers who pay qualified higher education expenses for an eligible student attending an eligible educational institution, such as a college or university.
There are two types of education tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC is available for up to four years of undergraduate education and provides a credit of up to $2,500 per eligible student.
The LLC, on the other hand, is available for undergraduate, graduate, and professional degree courses and provides a credit of up to $2,000 per tax return.
Both credits have income limits, and taxpayers can only claim one credit per student per tax year. It’s important to note that the credits are non-refundable, meaning they can only be used to reduce your tax liability and cannot result in a refund.
Requirements for the Educational Tax Credit
To be eligible for both the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit, a taxpayer must meet three requirements.
Firstly, they, their dependent, or a third party must pay qualified higher education expenses. Secondly, they, their spouse, or a dependent listed on their tax return must qualify as an eligible student.
Lastly, the eligible student must be enrolled at an eligible educational institution.
The AOTC is specifically for eligible students who have not yet completed their first four years of higher education. The student must not have claimed the AOTC or former Hope credit for more than four tax years. The student must also be enrolled at least half-time for one academic period, as determined by the school, during the tax year. Additionally, they must not have a felony drug conviction as of the end of the tax year.
The American Opportunity Tax Credit (AOTC) has income limits for eligibility. The credit begins to phase out at a modified adjusted gross income (MAGI) of $80,000 for single filers and $160,000 for married taxpayers filing jointly for full credit. Taxpayers with a MAGI of more than $90,000 for single filers or $180,000 for married taxpayers filing jointly cannot claim the credit. If your MAGI falls between these brackets, you can claim a reduced credit.
Eligible students can claim up to $2,500 in tax credits for the first four years of higher education. This credit is calculated as 100% of the first $2,000 spent on qualified higher education expenses and 25% of the next $2,000. Therefore, the maximum amount that an eligible student can claim is $2,500: (100% × $2,000) + (25% × $2,000). This means that the maximum $2,500 AOTC can offset $4,000 spent on qualified higher educational expenses.
The AOTC is a partially refundable tax credit, which means that if the credit reduces your tax liability to less than zero, the IRS will send you a check for up to 40% of the remaining credit. The maximum refundable portion of the credit is $1,000 (40% × $2,500).
American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are two different types of education tax credits. Here are the main differences between them:
1. Maximum credit amount: The AOTC has a maximum credit of $2,500 per eligible student, while the LLC has a maximum credit of $2,000 per tax return.
2. Credit availability: The AOTC can only be claimed for four tax years per eligible student, while the LLC can be claimed for an unlimited number of tax years.
3. Eligible expenses: The AOTC can only be used for qualified education expenses related to an undergraduate degree or other recognized education credential, while the LLC is more flexible and can be used for undergraduate, graduate, or professional degree courses.
4. Enrollment requirements: The AOTC requires the student to be enrolled at least half-time for at least one academic period during the tax year, while the LLC is available to students enrolled in at least one course for at least one academic period.
5. Felony drug conviction: Students with a felony drug conviction cannot claim the AOTC, but there is no such requirement for the LLC.
It’s important to note that taxpayers can only claim one education tax credit per student per tax year, so they need to carefully consider which credit to claim based on their individual circumstances.