Paying for college is no small feat, but the federal government offers helpful tax benefits designed to ease the burden. One such benefit is education tax credits, which can significantly reduce the amount of tax you owe—and in some cases, even give you money back. Understanding how to take advantage of these credits can make a big difference in covering college costs.
1. Understand the Two Main Education Tax Credits
There are two primary federal tax credits for education expenses: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Each offers unique benefits and eligibility requirements.
- American Opportunity Tax Credit (AOTC): Offers up to $2,500 per eligible student per year for the first four years of higher education. Up to 40% of the credit ($1,000) may be refundable.
- Lifetime Learning Credit (LLC): Provides up to $2,000 per tax return per year and is available for all years of postsecondary education, including graduate courses. This credit is non-refundable.
2. Check Your Eligibility
Before claiming a credit, ensure you meet the required criteria. Eligibility is based on your income, student status, and qualified expenses.
- Income limits: The AOTC starts to phase out at a modified adjusted gross income (MAGI) of $80,000 ($160,000 for joint filers). The LLC phases out starting at $80,000 ($160,000 for joint filers) as well.
- Enrollment requirements: AOTC requires at least half-time enrollment in a degree or certificate program, while LLC has no enrollment or degree requirements.
- Qualified expenses: Both credits apply to tuition and required enrollment fees. AOTC also includes course materials like books and supplies.
3. Gather Proper Documentation
To claim an education credit, you’ll need supporting documents:
- Form 1098-T: The educational institution provides this form, which details the amount paid for qualified tuition and fees.
- Receipts and records: Keep receipts for books, supplies, and any other eligible expenses not listed on your 1098-T.
These documents are essential if you’re ever audited by the IRS or need to verify your claims.
4. Choose the Right Credit
You can’t claim both credits for the same student in the same tax year. Pick the one that provides the greatest benefit:
- Use AOTC for undergraduates: If you qualify, the AOTC often yields a higher credit and includes a refundable portion.
- Use LLC for graduate students or lifelong learning: This credit is more flexible but limited in amount and non-refundable.
5. Claim the Credit on Your Tax Return
To take advantage of these credits, complete the necessary IRS forms when you file your taxes:
- IRS Form 8863: Use this form to report both AOTC and LLC information to the IRS.
- Provide student and school details: Include the student’s Social Security number and school’s EIN as listed on Form 1098-T.
If you use tax software, it will usually prompt you to enter this information. Otherwise, work with a tax professional to ensure proper filing.
Final Thoughts
Education tax credits can offer powerful financial relief when paying for college. By understanding the differences between the AOTC and LLC, reviewing eligibility, and properly filing the correct forms, you can reduce your tax burden or even receive money back. Take advantage of these valuable benefits each year you’re eligible—and keep more money in your pocket while investing in education.