UPDATED FOR 2021
Paying for college is crazy expensive – even when it’s mostly online. And if you’re footing the bill for more than one education, your finances are probably stretched pretty thin.
Two tax credits can help put more money back in your pocket: The American Opportunity Tax Credit and the Lifetime Learning Credit. And the more generous of the two credits – the AOTC – chops $2,500 per student off your tax bill. Plus, a pretty big portion of that tax credit is refundable – meaning if you don’t owe any taxes, you can get cash back.
If you qualify, you will get a bigger break using the AOTC. But no worries if you don’t qualify for that one, because you may still be able to use the Lifelong Learning Credit (LLC). Yeah, the LLC gives you less money back… but it’s still a dollar for dollar discount on your taxes.
Can You Benefit from Education Tax Credits?
Like with all tax credits, the IRS throws up some obstacles you have to overcome in order to lower your tax bill. There are 3 basic rules that cover general eligibility for both tax credits:
- The student has to be listed on your tax return – you, your spouse, or a dependent
- You have to have paid for “qualified education expenses,” basically fees, tuition, and books
- The student goes to an “eligible” school, which includes colleges, universities, trade schools, and more
If you have multiple students on your tax return, you can take a credit for each one. BUT you can claim only one of the credits – not both – per student.
Now that those hurdles are cleared, we’ll walk through the credits, starting with the AOTC.
Cash in on the AOTC
The AOTC covers the first four years of a degree-oriented undergrad college education (certifications and trade programs count here, too) for every student in your family – including you. Each student has to be enrolled at least half-time for the expenses to qualify.
If the student isn’t taking enough credits, has passed the four-year maximum, or is in graduate school, check out the LLC instead.
Here’s how the AOTC works for each student:
The tax credit equals 100% of the first $2,000 you pay plus 25% of the next $2,000 you pay, for a total credit of $2,500. If that’s more than your total tax bill, you can get 40% – $1,000 – back in cash. That’s the beauty of a refundable tax credit.
So if, for example, you’re sending two kids and yourself to college, you get three education tax credits. Here’s how that looks with numbers.
| The Student | College Expenses | Tax Credit |
|---|---|---|
| You | $1,500 | $1,500 |
| First Child | $8,000 | $2,500 |
| Second Child | $3,600 | $2,400 |
Your total AOTC would be $6,400:
- Your credit is limited to the amount of expenses paid.
- The first child’s expenses snag the full credit.
- The second child’s expenses get a partial credit: $2,000 (100% of the first $2,000) plus $400 (25% of $1,600) for a $2,400 credit.
Like other tax credits, this one phases out as income gets higher. For the AOTC, the credit disappears entirely for single filers making $90,000 a year and married filers making $180,000 a year.
Lower your tax bill with the LLC
If your student doesn’t qualify for the AOTC, they may still qualify for the less generous but more flexible Lifetime Learning Credit.
The LLC covers 20% of the first $10,000 of qualified tuition expenses, so up to $2,000 maximum non-refundable credit per tax return – not per student like the AOTC.
The income phase outs for the LLC are also different. You can’t take this credit if your income is over $69,000 for single filers or $138,000 for married filers.
Where this education tax credit shines is in its flexibility. The LLC covers pretty much any higher education you pay for. So if your student is in grad school… is taking longer than four years to finish an undergrad degree (super common)… or is taking classes to help maintain or improve job skills… the LLC covers it.
Where the Education Credits Go on Your Tax Return
If you’re able to take either or both of these education tax credits, you’ll need to include 2 extra forms on your tax return.
First, to apply for either the AOTC or the LLC, you’ll need to fill out IRS Form 8863 with your tax return. You’ll need to fill out a separate page 2 of the form for each student.
Second, the summary information from Form 8863 line 19 goes on line 3 of Schedule 3: Additional Payments and Credit in your tax return.
You can find more information on these valuable tax credits here: IRS Publication 970: Tax Benefits for Education.
Not sure which education tax credits or deductions make the most sense for your tax return? Contact me today to schedule a free 30-minute consultation.