What Are Education Tax Credits? | Comparing AOTC & LLC

The United States government offers Education Tax Credits (ETCs) to eligible students and people who pay for education. Tax credits are a dollar-for-dollar deduction on a tax bill that lower the amount of taxes you owe. If the deductions bring the amount of taxes you owe to below zero, you might receive a refund.  These credits were designed to reward students for going to college and help make tuition more affordable.

There are two possible tax credits students can receive: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). To receive either one, students have to meet a variety of criteria. Some are the same and others differ.

To receive either the AOTC or LLC credit, you must, at a minimum, meet the following criteria:

  1. You, your dependent, or a third party must pay qualified expenses for higher education. Qualified expenses include tuition and fees required for enrollment.
  2. An eligible student must be enrolled at an eligible higher education institution. Eligible higher education institutions are ones that qualify for federal student aid. They must have a Federal School Code.
  3. The eligible student (whether it’s you, your spouse, or a dependent) must be on your tax return. An eligible student cannot be married and file separately.

Beyond this, students must meet additional different criteria to be eligible for the AOTC and LLC.

AMERICAN OPPORTUNITY CREDIT

The American Opportunity Tax Credit is a modification of a previous credit, the Hope Credit.

Students, spouses of students, and third parties (such as parents of students) can claim the AOTC. The person who claims it must have paid the qualified expenses (such as the tuition and fees) of someone in school. That person can request the AOTC to apply toward expenses paid during the prior year or during the first three months of the year, the taxes are being filed.

Once you’ve qualified, you can apply for the AOTC once per calendar year for the first four years of a student’s college education. That student must be in a program that leads to a degree or certificate, and they must be enrolled at least half-time during one academic period (such as 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

CriteriaAOTCLLC
Maximum CreditUp to $2500 per eligible studentUp to $2000 per credit return
Refundable or Not Refundable40% of creditNot refundable 
Limit on MAGI for Married Filing Jointly$180,000$134,000
Limit on MAGI for single, head of household, or qualifying widow(er)$90,000$67,000
Number of Years of College Education Available4Unlimited
Type of Program RequiredThe student must be pursuing a degree or certificate  The student does not have to be pursuing a degree or certificate
Number of CoursesThe student must be enrolled at least half time for at least one academic period beginning in 2018Available for one or more courses
Qualified ExpensesTuition, required enrollment fees, required course materialsTuition and fees required for enrollment or attendance
Whom Can You Claim the Benefit for?
  • You
  • Your spouse
  • The student you claim as a dependent
  • You
  • Your spouse
  • The student you claim as a dependent
Who Must Pay the Qualified Expenses?
  • You or your spouse
  • Student
  • Third party
  • You or your spouse
  • Student
  • Third party

Source

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.

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