Introduction : Education Tax Credit
What Is an Education Tax Credit?
Education tax credits are available for taxpayers who pay qualified higher education expenses for an eligible student to an eligible educational institution, such as a college or university. The two types of education tax credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit .
How Education Tax Credit Work
Education tax credits may be claimed by those who incur qualifying educational expenses, such as tuition and fees. Parents who pay these expenses for their children may be able to claim this type of credit on their tax returns, subject to certain income restrictions.
There are two types of education tax credits: the American Opportunity Tax Credit (AOTC) and the lifetime learning credit. The AOTC applies to the first four years of postsecondary education, with certain restrictions. The Lifetime Learning Credit applies to all students at the undergraduate, graduate, and professional levels. You cannot claim both for the same student in the same tax year.
Requirements for the Education Tax Credit
Both credits also have their own eligibility rules, but a taxpayer must meet all three of these requirements for both:1
- You, your dependent, or a third party must pay qualified higher education expenses.
- You, your spouse, or a dependent listed on your tax return qualify as an eligible student.
- The eligible student (above) must be enrolled at an eligible educational institution.
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American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is for eligible students who have not yet completed their first four years of higher education. They must not have claimed the AOTC or former Hope credit for more than four tax years. The student must 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.
There are income limits for claiming the AOTC. 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. Single taxpayers with a MAGI of more than $90,000, or MFJs with a MAGI over $180,000, cannot claim the credit. Income in between these brackets allows for claiming a reduced credit.
Eligible students can claim 100% of the first $2,000 spent on school expenses and another 25% of the next $2,000. The maximum amount that an eligible student can claim is, therefore, $2,500: (100% × $2,000) + (25% × $2,000). In other words, the maximum $2,500 AOTC can offset $4,000 spent on qualified higher educational expenses.
The AOTC is a partially refundable tax credit.
Lifetime Learning Credit
The Lifetime Learning Credit has broader eligibility requirements than the AOTC, as it is intended for taxpayers at all education levels. The Lifetime Learning Credit can be used for a wide range of schools, including vocational training or professional degree courses, also for tuition at more traditional four-year undergraduate and graduate schools.
To be eligible for the Lifetime Learning Credit, a student must be enrolled in a course to earn education credits or improve job skills at an eligible educational institution for at least one academic period, as determined by the school. The student will receive a Form 1098-T, Tuition Statement, from the educational institution if it is an eligible school as defined by the IRS.
After Dec. 31, 2020, the MAGI used by joint filers for the Lifetime Learning Credit is not adjusted for inflation. The credit is phased out for taxpayers with a MAGI between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint returns.
Eligible students can claim 20% of the first $10,000 of qualified education expenses. The maximum amount that an eligible student can claim is, therefore, $2,000 (20% × $10,000). The Lifetime Learning Credit is not refundable.
Criticisms of Education Tax Credit
Critics of subsidies for higher education have long argued that education tax credits are one reason that the cost of higher education has been rising many times faster than inflation. According to these critics, education tax credits simply raise the overall cost of college without an actual increase in access to it. Tax credits make more money available for spending on education, but they do nothing to increase the supply or quality of schooling.
What Are the Major Differences Between the AOTC and the Lifetime Learning Credit?
The AOTC has a maximum of $2,500, and the Lifetime Learning Credit maximum is $2,000. Both credits cannot be claimed in the same tax year for the same student.
The AOTC can only be used for undergraduate expenses, while the Lifetime Learning Credit is more flexible. The AOTC can only be claimed for four tax years; the Lifetime Learning Credit can be claimed an unlimited number of times.
Students cannot have a felony drug conviction and claim the AOTC. This is not a requirement for the Lifetime Learning Credit.
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