Tax Credit Programs - Education Tax Credits

Summary

THE AMERICAN OPPORTUNITY TAX CREDIT

The American Opportunity Tax Credit (AOTC) is a federal tax credit that allows students who are taxpayers or their parents the opportunity to lower the cost of attending college by reducing the amount of a filer’s income tax.

To qualify for the AOTC, an individual must be an eligible student. This can be either the taxpayer, spouse of the taxpayer, or a dependent on the taxpayer’s tax return who has qualified education expenses. The taxpayer’s modified adjusted gross income (MAGI) must be below the program’s guidelines.

To apply, taxpayers must fill out the Department of the Treasury, Internal Revenue Service, 8863 tax form, Education Credits (American Opportunity and Lifetime Learning Credits) and attach it to his/her NYS income tax return.

LIFETIME LEARNING CREDIT

The Lifetime Learning Credit (LLC) is a federal tax credit that offsets the costs of higher education by reducing the amount of a filer’s income tax.

To qualify for the LLC, an individual must be an eligible student. This can be either the taxpayer, spouse of the taxpayer, or a dependent on the taxpayer’s tax return who has qualified education expenses. The taxpayer’s MAGI must be below the program’s guidelines.

American Opportunity Tax Credit (AOTC)

DESCRIPTION OF THE AMERICAN OPPORTUNITY TAX CREDIT

The American Opportunity Tax Credit, formerly the known as the Hope Credit, provides a maximum credit of $2,500 per eligible student. This includes 100% of the first $2,000 of qualified paid education expenses and 25% of the next $2,000 of qualified paid education expenses paid. Forty percent (40%) of the credit is refundable, which means that up to $1,000 of the AOTC can be refunded, even if the filer’s tax liability is zero. The credit is only available for 4 tax years per eligible student.

The amount of the credit may be reduced by the amount of a filer’s income, see below.

Peter and Mia Ford are married and file a joint tax return. For 2020, they claim an exemption for their dependent daughter on their tax return. Their adjusted gross income is $70,000. Their daughter is in her junior (third) year of studies at a local university. Peter and Mia paid qualified education expenses of $4,300 in 2020.

Peter, Mia, their daughter, and the local university meet all of the requirements for the AOTC. Peter and Mia can claim a $2,500 AOTC, which is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Since their tax liability is $1,500, they receive a credit of $1,500 reducing their tax liability to $0 and are eligible for a refund of $1,000.

QUALIFYING FOR THE AMERICAN OPPORTUNITY TAX CREDIT

Eligible Educational Institution

The student must attend an eligible education institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.

It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to inform a filer whether it is an eligible institution.

Eligible Student

The individual must be an eligible student. This can be either the taxpayer, spouse of the taxpayer, or a dependent on the taxpayer’s tax return who has qualified education expenses. In addition, the student:

Did not have expenses that were used to claim an American Opportunity Credit in any 4 earlier tax years, which includes any tax year(s) in which the student claimed the Hope Credit (currently known as the American Opportunity Tax Credit);
Has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of the tax year;
Must be pursuing a degree or other recognized education credential;
Has not completed any of the first 4 years of undergraduate education (generally, the freshman, sophomore, junior, and senior years of college) in the beginning of the tax year; and
Was enrolled at least half-time in an accredited post-secondary institution leading to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year.
- Half-time: if the student is taking at least half the normal full-time workload for his/her course of study.
- The standard for what is half of the normal full-time workload is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965, go to https://www.law.cornell.edu/cfr/text/34/668.2 for more information.

Qualified Education Expenses

Qualifying educational expenses are tuition and related course materials, including book expenses, supplies, and equipment needed for a course of study whether purchased from the educational institution or not. Student-activity fees are also included in qualified education expenses only if the fees were paid to the institution as a condition of enrollment or attendance.

Qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), room and board, transportation, or similar personal, living, or family expenses. This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Michael is a sophomore in University V’s degree program in landscape architecture and living in the dorms. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the equipment he will use in this program. Because the equipment rental is required for his course of study, Michael’s equipment rental fee is a qualified expense. However, the dorm fees are not included as a qualifying education expense.

A student can claim an AOTC for qualified education expenses not refunded if the student withdraws.

Citizenship/Immigration Requirements

The taxpayer (or spouse) must be a U.S. citizen or a either a resident or nonresident immigrant for any part of tax season being claimed and did not elect to be treated as a resident immigrant for tax purposes. For more information go to https://www.irs.gov/businesses/taxation-of-nonresident-aliens-1.

Individual Taxpayer Identification Numbers (ITIN) issued by the IRS to non-citizens, and non-work Social Security numbers issued to applicants or recipients of federally funded benefits programs cannot be used to claim the credit.

Assets/Resources

There are no assets/resource requirements.

Income

The Modified Adjusted Gross Income (MAGI) is the adjusted gross income as calculated on a taxpayer’s federal income tax return, which is typically the amount after allowed deductions are taken.

For the education tax credits the taxpayer’s MAGI must be below the program’s income guidelines.

Below $180,000 if married filing jointly, 90,000 if single head of a household or a qualifying widow/er.
The amount of the AOTC is gradually reduced for filers with incomes from $80,000 to $90,000; $160,000 to $180,000 if filing a joint return.
The AOTC is not available for people with incomes above these amounts.

The Internal Revenue Service (IRS) uses MAGI to establish when a tax filer qualifies for certain tax benefits, such as AOTC. This should not be confused with MAGI budgeting for Medicaid purposes. For more information on MAGI budgeting, refer to Health Programs, Medicaid, Qualifying for MAGI Medicaid, Income.

CLAIMING THE AMERICAN OPPORTUNITY TAX CREDIT

Taxpayers can claim the AOTC by completing Parts I, III, and IV of the 8863 form, https://www.irs.gov/pub/irs-pdf/f8863.pdf, instructions are available at https://www.irs.gov/pub/irs-pdf/i8863.pdf and submitting it the completed 1040 form.

See below, Additional Resources, for free tax preparation information.

Lifetime Learning Credit (LLC)

DESCRIPTION OF THE LIFETIME LEARNING CREDIT

The Lifetime Learning credit provides a tax credit of up to $2,000 on qualified education expenses. The amount of the credit may be reduced by the amount of a filer’s income.

QUALIFYING FOR THE LIFETIME LEARNING CREDIT

Eligible Student

An individual must be an eligible student. This can be either the taxpayer, spouse of the taxpayer, or a dependent on the taxpayer’s tax return who has qualified education expenses. In addition, the student:

Must be enrolled in one or more courses at any post-secondary tuition, including graduate school or undergraduate education beyond four years, and
Is available for any course-load, that is, the student does not have to be enrolled at least half-time.

LLC is not limited to 4 tax years as with the AOTC. The credit is available for an unlimited amount of time as long as the individual is eligible. The student does not have to be pursuing a degree or other recognized education credential. In addition, there are no felony drug conviction limitations.

Qualified Education Expenses

Qualifying expenses include tuition and fees, course-related books, supplies, and equipment, if such fees and expenses must be paid to the institution as a condition of enrollment or attendance.

An individual can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws.

Citizenship/Immigration Requirements

To claim the education tax credit, the taxpayer (or spouse) must be a U.S. citizen or a resident or nonresident immigrant for any part of tax season being claimed and the nonresident alien did not elect to be treated as a resident alien for tax purposes. For more information go to https://www.irs.gov/uac/about-publication-519.

Assets/Resources

There are no assets/resource requirements.

Income

The Modified Adjusted Gross Income (MAGI) is the adjusted gross income as calculated on a taxpayer’s federal income tax return. This amount is typically after most of the deductions are taken.

For the education tax credits the taxpayer’s MAGI must be below the individual program’s income guidelines.

The MAGI for the LLC must be below $180,000 if married filing jointly, $90,000 if single head of household or a qualifying widow/er.
The amount of LLC is gradually reduced for filers with MAGI between $80,000 to $90,000; between $160,000 and $180,000, if filing a joint return. The LLC is not available for filers with incomes above these amounts.

The Internal Revenue Service (IRS) uses MAGI to establish when a tax filer qualifies for certain tax benefits, such as AOTC. This should not be confused with MAGI budgeting for Medicaid purposes. For more information on MAGI budgeting, refer to Health Programs, Medicaid, Qualifying for MAGI Medicaid, Income.

CLAIMING THE LIFETIME LEARNING CREDIT

Taxpayers can claim the LLC by completing the 8863 found at https://www.irs.gov/pub/irs-pdf/f8863.pdf, instructions are available at https://www.irs.gov/pub/irs-pdf/i8863.pdf and submitting it the completed 1040 form.

See below, Additional Resources, for free tax preparation information.

Coordination of the American Opportunity Tax Credit and Lifetime Learning Credit

If a taxpayer is eligible to claim the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student in the same year, the taxpayer must choose which one to claim, they cannot claim both.

If a filer pays qualified education expenses for more than one student in the same year, they can choose to take the AOTC and LLC on a per-student, per-year basis. This means that, for example, a filer can claim the AOTC for one student and the LLC for another student in the same year. Or the filer can claim the AOTC for each eligible student or the LLC for each eligible student, but again, not both programs for each student.

The AOTC is likely to be the preferred tax break for college expenses within the first 4 years of postsecondary education. However, individuals should compare the tax calculations and choose whichever tax break generates the most tax savings for his/her situation.

Also keep in mind a few things; the AOTC is only available for 4 tax years whereas the LLC is available for an unlimited number of tax years, a student does not need to be pursuing a degree to be eligible to claim the LLC. The student could complete a career development class to learn or improve job skills, for example. Lastly, individuals claiming the AOTC credit cannot have a felony drug conviction. For LLC felony drug convictions do not make the individual ineligible.