The cost of college has increased significantly over the years. Thus, to help students afford their education, the federal government has created education tax credits.
However, there are specific rules and guidelines that you, as a student, need to know about. For instance, you cannot claim the American Opportunity Education Credit if you have a felony on your record.
You cannot claim a tax credit for tuition expenses unless you have a dependent who is attending the same post-secondary institution as you. But, this tax break can save you a significant amount of money, but here lies the question – How?
In this guide, we will help you to understand the types of education tax credits and how they can prove to be the greatest tax savings.
What is an Education Tax Credit?
Are you curious – what is an education tax credit? To put it in a simpler manner, Education tax credits are a way to write off the cost of your education. You can claim them if you attend a qualifying post-secondary institution.
The post-secondary institution must send you a form called Form 1098-T. This form lists your qualified educational expenses. Moreover, these expenses include tuition, fees, and course materials.
How Education Tax Credits Work?
To help families with the costs of college, the federal government has established a program called the education tax credit. These credits reduce your tax obligation dollar-for-dollar on qualified education expenses.
For example, you can claim a tax deduction for the interest paid on your student loans. These credits can lower your total income tax bill by as much as $2,500.
The credit can help you pay for the first four years of a college education. Furthermore, it is available to anyone who qualifies for it.
Basic Requirements for the Education Tax Credit
Education tax credits can be used for a variety of expenses, including tuition and fees. Other qualified expenses include books, supplies, equipment, and student activity fees.
The number of eligible expenses varies with each mission. Some expenses qualify for either the education tax credit or the standard deduction, and some are not.
If you are unsure if an expense qualifies for either credit, consult IRS publication 970 for more information.
Eligible educational institutions include public, nonprofit, and for-profit post-secondary institutions.
To be eligible, you must be enrolled in a degree, certificate, or diploma program at an eligible educational institution. You must also be enrolled at least half-time.
Types of Education Tax Credits
There are two types of education tax credits, and they are:
- The American Opportunity Tax Credit
- Lifetime Learning Credit
You can claim both credits on your taxes, but you can only claim one credit per year.
So, let’s get to know more about the tax credits and how you can claim it.
The American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a partially refundable education tax credit that was first detailed in Section 1004 of the American Recovery and Reinvestment Act of 2009. Its purpose is to encourage Americans to go to college. This credit is available to students and their parents who are enrolled in an eligible school.
How it works?
This tax credit is available for the first four years of undergraduate education. It can be worth up to $2,500 per student. The credit can be used for tuition, course materials, and enrollment fees. However, the credit can only be claimed once per year for up to four years. The maximum credit for this credit is $180,000 for married couples filing jointly and $80,000 for singles.
What are the criteria?
To be eligible for the American Opportunity Tax Credit, you must be taking at least six credit hours per semester. You must also be enrolled in an educational institution. The education expenses must be paid by you.
If your income is above the limits for the credit, you may still be able to claim the education tax credit by taking advantage of education tax credits for low-income taxpayers. These credits are worth up to $1,000 per eligible student and can help you pay for your education expenses.
What are the limitations?
You can’t receive this credit for graduate or professional courses. If you make more than this, the credit will be phased out, and you will not be able to receive it. However, if you meet the other criteria, you can still claim the education tax credit.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) reduces your tax bill for expenses related to obtaining a higher education. The credit can be used for tuition, fees, books, and equipment.
How it works?
You can claim up to $2,000 for the credit. The credit also applies to your spouse and dependents. If you are planning on using the Lifetime Learning Credit, make sure to use IRS Form 8863. The form requires you to input the information from Form 1098-T.
What are the criteria?
There is no credit hour requirement to be eligible for the Lifetime Learning Credit. You must be enrolled in an eligible educational institution, and you must be paying for your education expenses with your own money.
What are the limitations?
The Lifetime Learning Credit can be put to use for an unlimited number of years. The amount you can claim depends on the number of years you spent attending qualifying educational institutions and the number of qualified expenses you paid.
What are the Major Differences Between the AOTC and the Lifetime Learning Credit?
You cannot claim both credits on your taxes at the same time. Other than these, there are a few differences between AOTC and Lifetime Learning Credit:
- The American Opportunity Tax Credit is worth up to $2,500 per eligible student, while the Lifetime Learning Credit is worth up to $2,000 per eligible student.
- To be eligible for the American Opportunity Tax Credit, at least six credit hours per semester is mandatory. Moreover, there is no requirement for credit hours to become eligible for the Lifetime Learning Credit.
Education Tax Credit Income Limit
There is no education tax credit income limit. You can claim the education tax credit on your taxes regardless of your income level. However, there are income limits for the American Opportunity Tax Credit and the Lifetime Learning Credit.
To be eligible for the American Opportunity Tax Credit, you have to adjust the gross income, and it must be below $80,000 if you are single. But, it will be $160,000 if you are married and filing jointly or $40,000 if you are filing separately.
To be eligible for the Lifetime Learning Credit, make adjustments in the gross income. It has to be below $55,000 if you are single. Other than this, if you are married filing jointly, $110,000, or if you are married filing separately, it is $27,500.
If your income is above these limits, you may still be able to claim the education tax credit by taking advantage of education tax credits for low-income taxpayers. These credits are worth up to $1,000 per eligible student and can help you pay for your education expenses.
Takeaways – Education tax credits and deductions
The education tax credit is a type of tax relief that can help you pay for your education expenses. You can claim the education tax credit on your taxes for education expenses that you paid in the past year.
For example, if you paid education expenses in 2021, you can claim the credit on your 2021 taxes. The education tax credit can help you offset the cost of your education and make it more affordable. Moreover, if you are eligible for the credit, be sure to claim it on your taxes to get the maximum benefit.
To learn more about education tax credits for low-income taxpayers, contact your tax advisor or the IRS.