Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Education credits help you save money

Several education credits can ease the financial blow of college costs and these tax credits are the rewards from Uncle Sam for investing in your education. These can be claimed for qualified expenses that include tuition and required fees for enrollment at eligible post-secondary educational institutions. There are two education credits that can reduce the amount of tax owed: the American Opportunity Credit, and the Lifetime Learning Credit.

education credits, taxes, IRS, college

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The AOTC was set to expire at the end of 2012 but was extended through December 2017 by the American Taxpayer Relief Act of 2012. Generally, the maximum credit is up to $2,500 per student and 40% of the credit may be refundable if no tax is due. Taxpayers whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return, can take full advantage of the credit. One of the disadvantages of AOTC is that it can be claimed only during the first four years of higher education as opposed to the Lifetime Learning Credit.

The Lifetime Learning Credit can be claimed for tuition and fee payments to a post-secondary school during the year. This credit can be claimed for any post-secondary classes that are taken, including ones where you are not working towards earning a degree. As of 2015, the maximum credit that can be claimed is 20% of up to $10,000 in eligible costs. Taxpayers whose modified adjusted gross income is $55,000 or less, or $110,000 or less for married couples filing a joint return can claim the credit with no limitations.

There are no double benefits allowed and only one type of education credit can be claimed for each eligible student per tax year. If either of these credits is claimed on the tax return, Form 8863 of the individual tax return has to be filled out. In order to claim the tax credit for yourself as a taxpayer, you cannot be claimed as a dependent on a different taxpayer’s return.

By Keerthana Nichanamatlu