What Are Education Tax Credits? Comparing AOTC & LLC

The United States government provides Education Tax Credits (ETCs) for eligible students and individuals who cover educational expenses. Tax credits offer a one-to-one reduction in your tax liability, effectively reducing the amount of taxes you must pay. If these deductions bring your tax liability below zero, you may even be eligible for a tax refund. These credits were established to incentivize students to pursue higher education and ease the burden of tuition costs.

There are two potential tax credits available to students: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). To qualify for either of these credits, students must satisfy a range of criteria, some of which overlap while others differ.

To be eligible for either the AOTC or LLC credit, you must, at the very least, satisfy the following requirements:

1. Qualified expenses for higher education, such as tuition and mandatory fees, must be paid by you, a dependent, or a third party.
2. The eligible student must be enrolled in an eligible higher education institution, one that qualifies for federal student aid and possesses a Federal School Code.
3. The eligible student, whether it’s yourself, your spouse, or a dependent, must be included on your tax return. An eligible student cannot be married and file taxes separately.

In addition to these fundamental criteria, there are further distinct conditions that must be met to qualify for the AOTC and LLC.

AMERICAN OPPORTUNITY CREDIT

The American Opportunity Tax Credit (AOTC) represents a modification of a prior credit known as the Hope Credit.

Eligibility for the AOTC extends to students, spouses of students, and third parties (including parents of students) who have covered the qualified expenses, such as tuition and fees, for someone attending school. The individual claiming this credit must have made these payments either in the preceding year or within the initial three months of the year in which the taxes are being filed.

Once you meet the qualifications, you can apply for the AOTC once annually, limited to the first four years of a student’s college education. The student in question must be enrolled in a program leading to a degree or certificate and be enrolled at least half-time during one academic period (e.g., a semester) for the tax year.

This credit is calculated in two parts, meaning students can receive the tax credit on the following:

1. 100% of the first $2000 of eligible expenses
2. 25% of the next $2000 of eligible expenses

In short, the AOC is worth up to $2500 in tax credit per year. If you do not owe any taxes, you can have up to 40 percent of the tax credit refunded to you.

To remain eligible for this tax credit, your modified adjusted gross income must be $80,000 or less. For married couples filing jointly, it must be $160,000 or less.

LIFETIME LEARNING TAX CREDIT

The Lifetime Learning Credit is easier to qualify for than the AOTC.

Students become eligible for the LLC by taking at least one course during the tax year. Their course or courses can apply toward a degree or certificate, or they can simply stand alone. Said another way, students can earn this credit simply by taking a course or two to enhance their job skills.

There is no limit to the number of years students can apply for the LLC. Therefore, they can apply for one as they earn their undergraduate and/or graduate degrees. They can also apply for it to supplement the costs of undergraduate or graduate courses.

To be eligible for the LLC, applicants’ modified adjusted gross income must be $52000 or less. For married couples filing jointly, it must be $104,000 or less. You can only claim an LLC for one student per tax return.

The LLC is worth up to $2000 per return. Unlike the AOC, it does not offer a refund if you do not owe any taxes.

Like the AOTC, the LLC is available to U.S. Citizens and Resident Aliens. It is not available to students who are already claimed as a dependent on someone else’s tax return (such as a parent’s).

Key terms and forms for the LLC:

• Modified Adjusted Gross Income: this is the adjusted gross income, found online seven of Form 1040. Use Publication 970 through the IRS to help find this number. It helps you identify whether or not you’re eligible for the AOTC.
• IRS forms to use: Form 8863 (Education Credits) and Form 8863 Instructions (note that this is the same form you will use for the AOTC).

AMERICAN OPPORTUNITY TAX CREDIT VS. LIFETIME LEARNING CREDIT

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Taking advantage of the American Opportunity Tax Credit and the Lifetime Learning Credit help make higher education more affordable. Remember that to qualify for either, you must:

• Pay qualified expenses for higher education
• Have a student (or be a student) registered at a qualified college (one that has a Federal School Code)

Otherwise, the LLC is easiest to qualify for. To receive that tax credit, students can take as few as one class. They do not have to be pursuing a degree or certificate. And they can apply for the LLC for the duration of their academic career; there is no limit to the number of years it’s available.

The AOTC meanwhile, is more difficult to qualify for. To receive that tax credit, students must be enrolled at least half time for one academic period per year. They have to be pursuing a degree or certificate. And they can only apply for the credit for the first four years of college education.  

The IRS makes applying for the AOTC and the LLC relatively simple. Applicants can use Form 8863 for both, and instructions for applying are available online.

Be sure to take advantage of the government-supplied benefits.