How Tax Credits Like AOTC and LLC Ease College Expenses; Check if You Qualify
Paying tuition is simpler with tax credits. The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) help. These IRS credits reduce education expenses whether it is the parents covering a child's costs or students funding themselves.
Education tax credits
Education tax credits help cover the costs of higher education. Unlike deductions lowering taxable income, credits immediately reduce tax liability by the same amount. College students paying educational expenses not claimed as dependents may qualify. Parents paying a dependent child's college costs also qualify to claim credit, not a child.
For both 2023 and 2024, there are income limits that apply to both the American Opportunity Tax Credit and the Lifetime Learning Credit. Your filing status and your modified adjusted gross income determine these limits. You cannot claim either the American Opportunity Tax Credit or the Lifetime Learning Credit if you file your taxes as "married filing separately."
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit offers financial aid for education expenses, providing up to $2,500 in tax credits. This credit functions straightforwardly. Its most advantageous aspect is that a portion, up to $1,000, is refundable. This means you may receive a larger tax refund if you qualify. The AOTC covers 100% of the first $2,000 in eligible educational costs, and 25% of the next $2,000 (equating to $500). To fully benefit from the maximum $2,500 credit, you would need to incur at least $4,000 in qualifying education expenses during the tax year.
Are you eligible for AOTC?
-The student must be working towards a college degree or another approved educational credential.
-They need to be enrolled in school at least half-time for at least one academic period during the tax year.
-At the beginning of the tax year, they must have completed less than four years of higher education.
-No one else can have claimed the AOTC or the old Hope credit for them for more than four tax years.
-They shouldn't have a felony drug conviction by the end of the tax year.
AOTC only covers expenses like tuition, fees, books, course materials, and necessary equipment for the degree program. Other things like room and board and transportation don't count.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) gives a tax credit on learning costs. It's $2,000, or 20% of eligible education expenses up to $10,000. Unlike the AOTC, it's non-refundable—any remaining credit amount won't get sent back as a tax return. To qualify for LLC, the student needs enrollment at an approved school working toward a degree, certification, or skill-enhancing coursework for jobs. For the tax year, they should attend at minimum one academic term.
There is no time limit on how long you can claim the LLC, unlike the AOTC. It can be applied to courses that improve employment prospects and expenses related to undergraduate or graduate school. However, you can only claim books, supplies, and equipment if paid directly to the institution. Read more here.
Rules you should know before you claim Educational Tax Credits
The Lifetime Learning Credit (LLC) and American Opportunity Tax Credit (AOTC) cannot be used on one return for a single student. Moreover, education costs already deducted or credited cannot claim an education tax credit. Similarly, expenses covered by scholarships don't qualify for education tax credits. If multiple family members attend college, both credits can apply on one return. For instance, parents with two college-going kids can claim the Lifetime Learning Credit for one and the American Opportunity Tax Credit for the other, provided they pay their education costs.
To claim these education tax credits, you'll need information from IRS Form 1098-T, which colleges and universities provide to some students, outlining their higher education expenses. Then, you'll use Form 8863 to calculate and claim the education tax credit.