Tax Credit Education tax credits are available for taxpayers who pay qualified higher education expenses for an eligible student to an eligible educational.
such as a college or university. The two type of education tax credit are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
How Education Tax Credits Work
Education tax credits may be claim by those who incur qualifying educational expense, 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 type of education tax credits: the American Opportunity Tax Credit (AOTC) and the lifetime learning credit.
The AOTC applies to the first four year of postsecondary education, with certain restriction.
The Lifetime Learning Credit applies to all students at the undergraduate, graduate, and professional level.
You cannot claim both the AOTC and the Lifetime Learning Credit 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:
You, your dependent, or a third party must pay qualifi higher education expenses.
You, your spouse, or a dependent list on your tax return qualify as an eligible student.
The eligible student (above) must be enrolled at an eligible educational institution.
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 determin 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 limit for claiming the AOTC. The credit begin to phase out at a modify adjust gross income (MAGI) of $80,000 for single filers and $160,000 for married taxpayers filing jointly for full credit.
Single taxpayer with a MAGI of more than $90,000, or MFJs with a MAGI over $180,000, cannot claim the credit. Income in between these bracket allows for claiming a reduce credit.
Tax Credits Work
Eligible student can claim 100% of the first $2,000 spent on school expense 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. This means that if the credit reduce your tax burden to less zero.
then the Internal Revenue Service (IRS) send you a check for up to 40% of the remaining credit. The maximum refundable portion of the credit is, therefore, $1,000 (40% × $2,500).
Lifetime Learning Credit
The Lifetime Learning Credit has broader eligibility requirements than the AOTC, as it is intend for taxpayer at all education levels.
The Lifetime Learning Credit can be use for a wide range of schools, including vocational training or professional degree courses.
as well as for tuition at more traditional four-year undergraduate and graduate school.
To be eligible for the Lifetime Learning Credit, a student must be enroll in a course to earn education credit or improve job skills at an eligible educational institution for at least one academic period.
as determine by the school. The student receive a Form 1098-T, Tuition Statement, from the educational institution if it is an eligible school as defin by the IRS.
Lifetime Learning Credit
After Dec. 31, 2020, the MAGI used by joint filers for the Lifetime Learning Credit is not adjust for inflation.
The credit is phas out for taxpayer with a MAGI between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint returns.
Eligible student claim 20% of the first $10,000 of qualified education expenses.
The maximum amount that an eligible student claim is, therefore, $2,000 (20% × $10,000). The Lifetime Learning Credit is not refundable.
This mean that the credit can reduce your tax liability to zero, but it cannot be refunded to you beyond that point.
Criticisms of Education Tax Credits
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 credit 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 credit cannot be claim in the same tax year for the same student.
The AOTC can only be use for undergraduate expense, while the Lifetime Learning Credit is more flexible. The AOTC can only be claim for four tax years.
the Lifetime Learning Credit can be claim an unlimited number of times.
Lifetime Learning Credit
The AOTC require the student to be enrolled at least half time for an academic period, while the Lifetime Learning Credit is available to students enroll in at least one course for an academic period.
Student cannot have a felony drug conviction and claim the AOTC. This is not a requirement for the Lifetime Learning Credit.
Is My Vocational School an Eligible Educational Institution for the Lifetime Learning Credit?
Yes, your vocational school may count as an eligible educational institution for the Lifetime Learning Credit.
If your school is eligible, you receive a Form 1098-T from your school in the mail before you file your tax.
What If I Don’t Receive a Form 1098-T From My School?
If you do not receive a Form 1098-T, contact your school. Similarly, if you believe that the amount list on your 1098-T is incorrect, contact your school.
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