Each year education tax credits provide relief to millions of Americans who are shouldering the costs of higher education. Understanding eligibility will help you to determine whether you’re able to maximize this offering.
The Difference Between Tax Credits And Tax Deductions
What’s the difference between a tax credit and tax deduction anyway? Tax credits reduce taxes directly and do not depend on tax rates. Deductions reduce taxable income; their value thus depends on the taxpayer’s marginal tax rate, which rises with income.
Education tax credits help with the cost of higher education by reducing the amount of tax owed on your tax return. The two education available credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
AOTC covers qualified expenses paid for an eligible student for the first four years of higher education. The IRS allows you to get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
The LLC particularly deals with tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
Here’s how the IRS determines eligibility:
Who can claim an education credit?
There are additional rules for each credit, but you must meet all three of the following for both:
- You, your dependent or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse or a dependent you list on your tax return.
Who cannot claim an education credit?
You cannot claim an education credit when:
- Someone else, such as your parents, list you as a dependent on their tax return
- Your filing status is married filing separately
- You already claimed or deducted another higher education benefit using the same student or same expenses (see Education Benefits: No Double Benefits Allowed for more information)
- You (or your spouse) were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes (find more information in Publication 519, U.S. Tax Guide for Aliens)
Maximizing Education Tax Credits
Dave Du Val, vice president of Customer Advocacy for TaxAudit.com, told CPA Practice Advisor that taxpayers should wait for cost-intensive college years in order to maximize AOTC.
He said if you or your child is only able to qualify for a small amount of AOTC in the first or second year of college because you have a minimal amount of qualified education expenses (for example, if you are attending a low-cost junior college), it might be wise to delay claiming the AOTC until the student is in their more cost-intensive years. Du Val said this will allow you to claim a greater amount in AOTC, “particularly if it looks like they are not likely to complete their undergraduate education in four tax years,” which is a common occurrence.
He also suggests pre-paying for spring semesters by Dec. 31 because payments made in the tax year for academic periods either beginning in the current year or the first three months of next year qualify for a credit or deduction in the year paid.
To learn more about qualified education credits, click here.
Natasha Zena is co-founder of GetLioness.News, the go-to news source for everything female entrepreneur.