When you or your dependent is still a student, you should see if one of the two educational tax credits that support normal student expenditures is available to you.
These credits save you more money than a tuition deduction since they cut your tax bill dollar for dollar. If you are qualified for both credits, you must always claim the one that saves you the most money in taxes.
Learn more about these tax credits and how you can take advantage of them below:
What Is Education Credit?
Taxpayers that pay qualified higher-education expenditures for a qualifying pupil to an eligible academic facility, including a college or university, are entitled to education tax credits.
The American opportunity tax credit (AOTC) and the lifetime learning credit are the two forms of education tax credits.
How Do These Tax Credits Work?
Those that pay qualified study expenses, including tuition and fees, are eligible for education tax credits. Parents who pay these costs for their kids may be eligible for a tax credit, provided there are few income limits.
The American opportunity tax credit (AOTC) and the lifetime learning credit are two forms of education tax credits. With certain exceptions, the AOTC covers the first four years of postsecondary level.
The lifetime learning credit is available to all college and university students. In the same tax year, you cannot claim both the AOTC and the lifetime learning credit for the same pupils.
Which Educational Expenditures Are Eligible?
Eligible tuition and related expenditures paid by the taxpayer throughout the taxation year apply for an education credit, whether it be the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit.
Tuition and fees incurred for the registration or attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer at an authorized educational institution for courses of study are considered qualified tuition and related costs.
The AOTC requires that the expenditures be covered in a program leading to a postsecondary degree.
The expenses must be spent in a program to obtain a postsecondary degree or to gain or upgrade job skills to qualify for the Lifetime Learning Credit.
Student activity fees are only included in eligible education costs under the AOTC rules if they are made mandatory to the institution as a requirement of enrollment or attendance.
Whether or not the items are acquired from the educational institution, costs for books, supplies, and equipment required for a course of study are included in qualifying education expenses.
Student activity fees and expenses for course-related materials, supplies, and equipment are only included in eligible education expenses for the Lifetime Learning Credit if the costs and charges have to be paid to the facility for a person’s enrollment or attendance.
A college, university, vocational school, or any other postsecondary educational institution that is recognized and authorized to engage in the federal financial student aid programs operated by the Department of Education is considered a qualified educational institution.
Lifetime Learning Credit
Because it is meant for taxpayers of all educational levels, the lifetime learning credit has more comprehensive eligibility restrictions than the AOTC.
The lifelong learning credit can be applied to a variety of schools, covering vocational training and professional degree programs, as well as fees at four-year undergraduate and graduate schools.
A learner must be registered in a course to gain education credits or improve employment capabilities at an appropriate academic institution for at least one educational session, as decided by the institution, to be approved for the lifetime learning credit.
Pupils who qualify can claim 20% of the first $10,000 in eligible college expenses. As a result, the highest amount that a qualified pupil can claim is $2,000.
The credit for lifelong learning is non-refundable. This means that while the credit can lower your tax liability to zero, it cannot be reimbursed after that.
American Opportunity Tax Credit
Pupils who have not finished their first four years of higher education are qualified for the American opportunity tax credit (AOTC). They must have gone four years without claiming the AOTC or the previous Hope credit.
During the tax year, the student must be enrolled at least half-time for one academic quarter, as decided by the institution. Furthermore, as of the end of the tax year, they must not have been convicted of a criminal drug offense.
The AOTC is a tax credit that is partially refundable. In the case that the credit lowers your tax liability to below zero, the Internal Revenue Service (IRS) will give you a payment for up to 40percent of the residual credit.
This means that if the credit value exceeds the amount of tax you incur, you may be eligible for a refund of up to $1,000.
What Is The Difference?
The AOTC is limited to $2,500, while the lifetime learning credit is limited to $2,000 per person. At a greater MAGI level than the lifetime learning credit, the AOTC fades out. For the same pupil, both credits cannot be claimed in the same tax year.
The AOTC can only be used for undergraduate fees. However, the lifetime learning credit can be used for any educational purpose.
The AOTC can only be claimed once every four years. However, the lifetime learning credit can be claimed as many times as you choose.
The AOTC mandates that a pupil be enrolled at least half-time for an educational session, but the lifetime learning credit is open to all students who are engaged in at least one course for that period.
The AOTC is not available to students who have been convicted of a felony drug offense. The lifetime learning credit does not require this.
What’s The Required Form?
The IRS requires you to fill out Form 8863 and include it in your tax return if you claim any of the tax credits. You must compute the appropriate credit money based on your qualified educational costs on Form 8863.
You cannot be claimed as a dependent on another taxpayer’s tax return in order to receive the tax credit for yourself. If not, that taxpayer is the only one who may claim the credit in your place.