If you’re paying for higher education, two federal tax credits can help students lower their taxes: the American Opportunity Tax Credit and the Lifetime Learning Credit. The student for whom the credits are claimed can be the taxpayer, their spouse, and their dependent children.
The American Opportunity Tax Credit (AOTC) is available for qualified education expenses paid for an eligible student during their first four years of higher education. You can receive a maximum annual credit of $2,500 per student. If the credit reduces your tax liability to zero, you can receive a refund of 40% of any remaining credit amount (up to $1,000).
The credit covers 100% of the first $2,000 of qualified education expenses you paid for each eligible student and 25% of the next $2,000 for that student. To qualify for the AOTC, the student must:
- Be pursuing a degree or recognized credential,
- Be enrolled at least half-time for one academic period in the tax year,
- Not have completed the first four years of higher education at the start of the tax year,
- Not have claimed the AOTC or Hope credit for more than four years, and
- Not have a felony drug conviction by the end of the tax year.
To claim the full AOTC credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married couples filing jointly). If your MAGI is over $80,000 but below $90,000 (over $160,000 but below $180,000 for joint filers), you are eligible for a reduced credit amount. You cannot claim the credit if your MAGI exceeds $90,000 ($180,000 for joint filers).
The Lifetime Learning Credit (LLC) provides up to $2,000 per tax return, covering 20% of the first $10,000 in qualified tuition and related expenses for eligible students at approved educational institutions. It is non-refundable, meaning it can reduce your tax liability but will not result in a refund.
The LLC applies to undergraduate, graduate, and professional courses and courses for job skill improvement. The credit has no annual limit on the number of years it can be claimed. To qualify:
- You, your dependent, or a third party must pay eligible higher education expenses.
- The expenses must be for a student enrolled at an approved institution.
- The student must take higher education courses to earn a degree, another recognized credential, or improve job skills.
- The student must be enrolled for at least one academic period starting within the tax year.
In 2024, the full LLC credit is available for a MAGI up to $80,000 ($160,000 for joint filers), with a phase-out between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
To claim the AOTC or LLC, you typically need Form 1098-T from an eligible educational institution, which should be sent by January 31. However, for certain nonresident aliens or students with scholarships, Form 1098-T may not be required. In this case, you can still claim the credit by proving enrollment and paying qualified expenses.
If your income is too high to claim either credit, your child may qualify if they have enough taxable income, but you won’t be able to claim them as a dependent. Your savings will be the credit minus the tax benefit lost from the dependency exemption, which may be reduced based on your income. In most cases, the refundable portion of the credit will not be available if the credits are taken on the dependent child’s tax return.
Author Martha Eckhardt, EA, is a highly skilled Senior Tax Manager and Office Manager at Stephano Slack’s Haddonfield office. With a sharp focus on individual tax compliance, Martha excels in handling complex multi-state cases and serving high-net-worth clients. Her expertise includes managing trusts, preparing gift tax returns, and overseeing private foundations’ 990-PFs. Additionally, Martha brings specialized knowledge in Expat tax returns and associated Equalizations. For personalized tax solutions, reach her at 856-528-5386 or [email protected].
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