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How Do Education Tax Credits Work?

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The education tax credits can provide a reprieve for students and families saddled with high educational expenses and student loans. Read on to learn more about how you can maximize this tax advantage for you and your family.

In this article:

  1. What Are the Education Tax Credits?
  2. What’s the Difference Between AOTC and LLC?
  3. How to Apply for Education Tax Credits
  4. Limits to Expenses and Claims

Education Tax Credits | How to Save More Money from School Expenses

What Are the Education Tax Credits?

The education tax credits are benefits that reduce the amount you owe on your tax return. Some people tend to confuse this with tuition and fees tax deduction, which is different. Both, though, can complement each other.

The education tax credits, on the other hand, fall into two options: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). You, your partner or spouse, or a dependent you claim on your tax return can apply for either of them.

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To claim it, however, you need to have incurred qualified expenses for higher education from an eligible educational institution. You may not claim such credit if:

  • Another person has listed you as a dependent on their tax return and claimed the credit.
  • You are married filing separately.
  • You already took another type of deduction or credit for higher education (for employment, etc.).
  • Your spouse or you are a non-resident alien, and you do not choose to be a resident alien for tax purposes.
  • You are divorced, and your former spouse has claimed the credit.

To apply for the credit, you should possess a valid taxpayer identification number (TIN) for yourself and the qualifying student. It may be:

  • A Social Security number (SSN)
  • An individual taxpayer identification number (ITIN)
  • An adoption taxpayer identification number (ATIN)

You can contact the Social Security Administration (SSA) to receive one of the numbers for eligibility purposes. You can also visit your local security office or www.ssa.gov. Be aware that it takes up to six weeks or longer to receive the number after you submitted your application.

What’s the Difference Between AOTC and LLC?

The two education tax credits cover different situations and costs. The AOTC is:

  • Limited to four years of post-secondary education
  • Only eligible for four total years of tax credit
  • Applies only to recognized degree and credential programs
  • Qualified expenses include tuition, enrollment fees, and required course materials
  • Only available for students enrolled at least half the time
  • Refundable (you may receive up to 40% of the credit, up to $1,000, as a refund)

On the other hand, the LLC is:

  • Unlimited and can be used for any tax year when qualified education expenses were paid
  • The student must be enrolled in at least one course
  • Qualified expenses included tuition and fees only
  • Non-refundable (the credit will reduce the tax you owe, but you will not receive any additional funds as a refund)

How to Apply for Education Tax Credits

signing new contracts | How Do Education Tax Credits Work? | adjusted gross income
To apply for either type of credit on your 2018 tax return, use Form 8863 (Education Credits). The IRS also offers an interactive app to determine if you are eligible to receive an education credit.

Do You Qualify For IRS Back Tax Relief? Take The Quiz Now!

You should also receive a Form 1098-T (Tuition Statement) from the educational institution for you or the eligible student. One of the best ways to determine whether or not the school qualifies is if it accepts federal financial aid.

The AOTC is worth $2,500 per eligible student. It accounts for $2,000 of the first $2,000 of eligible expenses paid for each qualified student plus 25% of the next $2,000 of eligible expenses or $500. The LLC is simpler. It is up to $2,000 of eligible expenses and will reduce the tax you owe by that amount.

Limits to Expenses and Claims

To claim the LLC, your modified adjusted gross income (MAGI) must be $66,000 or less if you are a single filer or $132,000 or less if you are married filing jointly. The MAGI for the AOTC is $80,000 or less if you are a single filer or $160,000 or less if you are married filing jointly.

Some expenses don’t qualify for the education tax credits. These include:

  • Transportation
  • Insurance
  • Medical Expenses (although you can take tax deductions)
  • Non-required student fees
  • Expenses you paid with tax-free student aid
  • Room and board

 

There are pros and cons for each of these education tax credits. For example, AOTC is refundable. Meanwhile, you can use LLC during any tax year when you’ve paid qualifying educational expenses for continuing education, professional training, or other ongoing learning programs. In other words, this credit is eligible for graduate school, professional degree programs, and specialized training and certificate programs. In case you are still confused, Tax Relief Center is here to help you make the most of this to lower your income tax.

What do you think about the tax education credits? Share your thoughts in the comments section below.

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How Do Education Tax Credits Work? https://help.taxreliefcenter.org/education-tax-credits/

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