When it comes to the cost and related expenses of higher education, navigating these can seem rather unnerving. Fortunately, the IRS offers educational tax credits that can relieve the potential financial strain of these higher education expenses. The two education credits available are the American Opportunity Tax Credit (“AOTC”) and the Lifetime Learning Credit (“LLC”). Both credits offer opportunities for savings related to qualified post-secondary educational expenses incurred by the taxpayer, their spouse, or a dependent claimed on their tax return.
American Opportunity Tax Credit – AOTC: The American Opportunity Tax Credit provides a maximum annual tax credit up to $2,500 per eligible student. To be eligible the student must be (1) in their first four years of undergraduate education, (2) actively pursuing a degree or recognized educational credential, and (3) enrolled at least half time for at least one academic period of the year. Additionally, the student must not have a felony drug conviction by the end of the tax year. The AOTC phases out for higher-income taxpayers based on the current year modified adjusted gross income (“MAGI”). The full credit is available for single taxpayers with a MAGI of $80,000 or less ($160,000 or less for married filing jointly). For taxpayers where the MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for joint filers), a reduced credit will be received. Taxpayers with a MAGI exceeding $90,000 ($180,000 for joint filers) are not eligible to claim the AOTC. A portion of the American Opportunity Tax Credit is considered to be refundable. If the credit brings the taxpayer’s liability to zero, up to 40% of the remaining credit ($1,000 per eligible student) is refundable to the taxpayer.
Lifetime Learning Credit – LLC: Unlike the AOTC, the Lifetime Learning Credit is available for an unlimited number of years and can be used for undergraduate, graduate, and professional degree courses, including courses to improve job skills. The amount of this credit is 20% of the first $10,000 of qualified educational expenses with a maximum annual credit amount of $2,000. To qualify for the LLC, the student must be (1) enrolled at an eligible educational institution, (2) taking a higher education course or courses to get either a degree, other recognized education credential, or to get or improve job skills, and (3) enrolled for at least one academic period of the year. Similarly, the allowed credit amount is dependent on the taxpayer’s MAGI. The full credit is available for single taxpayers with a MAGI of $80,000 or less ($160,000 or less for married filing jointly). For taxpayers where the MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for joint filers), a reduced credit will be received. Taxpayers with a MAGI exceeding $90,000 ($180,000 for joint filers) are not eligible to claim the LLC. The Lifetime Learning Credit is a non-refundable tax credit meaning it can only reduce the taxpayer’s liability to zero and any excess is not capable of being refunded.
Understanding these credits and their eligibility requirements can result in reducing one’s tax liability and offers greater financial flexibility. The IRS provides a helpful interactive tool to determine eligibility of the above educational credits, located here. That said, here at CST we strive to stay informed on the changes in the IRS guidelines and to guarantee you take full advantage of these educational incentives if eligible.
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