What Are Education Tax Credits and How to Claim Them

It is no secret that higher education in the U.S. can seem like an unattainable goal sometimes. Astronomical prices, coupled with intricate and highly complex financial aid applications can be a turn off for prospective students who want to pursue a college degree.

Nonetheless, students should not immediately turn their backs on education, as there are different options available for you to potentially save money and relieve some financial burden.

One of these options is the Education Tax Credits. This credit can help those who pay for higher education reduce their tax bill, and in some cases, get more money for their refund. Here's what you should know about this benefit.

Who can claim an education credit?

If you paid for college during the previous tax year, you may be able to claim credits to reduce the amount of income taxes you have to pay.

College students can claim these credits for themselves if they are not claimed as a dependent on anyone else's tax return. If certain income thresholds are met, parents can claim the credit for their dependent students.

Education tax credits can only be claimed once per year, per student.

Types of Education Tax Credits

Education Tax Credits only apply to certain costs, which are also known as qualified education expenses. Depending on what credit you're looking at, tuition and fees can count toward these qualified education expenses.

You cannot claim tax credits for any expenses paid with tax-free scholarships, grants or fellowships. These awards are typically only taxable if they're awarded in excess of your total qualified education expenses.

Here are the two main education tax credits.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for eligible students for the first four years of higher education.

With the American Opportunity Tax Credit (AOTC), you can 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 amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.

To be eligible for the American Opportunity Tax Credit (AOTC), the student must:

• Be pursuing a degree or other recognized educational credential.
• Be enrolled at least half time for at least one academic period beginning in the tax year.
• Not have finished the first four years of higher education at the beginning of the tax year.
• Not have claimed the AOTC or the former Hope credit for more than four tax years.
• Not have a felony drug conviction at the end of the tax year.

To claim this credit, you must submit Form 8863 (attached below). Before you submit, you can check your institution's Form 1098-T to verify the information provided is correct (see below).

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) is for qualified tuition and fees, or 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. It is worth up to $2,000 per tax return.

Unlike the AOTC, for the lifetime learning credit, there is no limit on the number of years you can claim the credit.

To claim the LLC, you must meet all three of the following:

• You, your dependent or a third party pay qualified education expenses for higher education.
• You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.
• The eligible student is yourself, your spouse or a dependent you listed on your tax return.

To be eligible for LLC, the student must also:

• Be enrolled or taking courses at an eligible educational institution.
• Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.
• Be enrolled for at least one academic period beginning in the tax year.

To claim LLC, you must complete Form 8863 (attached below). Before you submit, you can check your institution's Form 1098-T to verify the information provided is correct (see below).

Other Education Benefits to Know

Education Tax Credits such as the AOTC and the LLC are not the only benefits available to you at the time of filing taxes. Here are three highlights of others you may be eligible for:

• Student loan interest deduction: taxpayers can deduct student loan interest they paid on loans taken for themselves, their spouse or their dependent. The maximum is $2,500, and it starts to phase out for taxpayers with a modified adjusted gross income above $70,000, or $140,000 for married couples filing jointly.
• Tuition and fees deduction: the tuition and fees deduction allows eligible taxpayers to deduct up to $4,000 from taxable income to help cover higher education costs.
• 529 plans: in these plans, you invest after-tax money. When you withdraw your earnings, you don't have to pay taxes if you use them for qualified education expenses.

What is Form 8863?

Use Form 8863 to figure and claim your education credits, which are based on qualified education expenses paid to an eligible postsecondary educational institution.

Click here to access Form 8863.

What is Form 1098-T?

Form 1098-T is a document issued by educational institutions to students who paid qualified education expenses (such as tuition and fees) during the tax year. Form 1098-T is used to report information about eligible education expenses for the purpose of claiming education related tax benefits, such as AOTC and LLC.

Click here to learn more about Form 1098-T.

Bottom Line

High tags in education can often be intimidating. However, don't let this immediately reconsider your possibilities of getting a college degree or improve your job skills, since there are a series of benefits and opportunities you might be eligible for.

With the Education Tax Credits, for instance, you can reduce part of your taxes owed to the IRS from the money that you paid in eligible education expenses such as tuition and fees.

While these terms might be intricate and complex, you can always talk to a specialist for more details and to better assess your individual case.

For more information on the Education Tax Credits, click here.