The Tax Benefits of Education Credits

August 22, 2016 : Jillian Yakominich

Understandably, the cost of higher education can leave you worrying about money. Whether you are attending a public or private school, completing a two or four-year degree, or taking a few courses here and there, the costs of attending educational institutions can leave you in debt.

Thankfully, there are a few tax education benefits that may help offset some education expenses. In particular, there are two education credits that every potential student should be aware of. These credits can reduce the amount of income tax owed on your tax return.

What Credits Are Available?

American Opportunity Credit (AOC)

The AOC allows a maximum credit of $2,500 for qualifying educational expenses paid during the tax year (100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses) for an eligible student attending an eligible educational institution.

In addition, up to 40% ($1,000) of the AOC is refundable, allowing taxpayers who do not have a tax liability to claim the credit.

Example: Eli and Monica pay $8,000 in eligible education expenses in 2016 for their daughter’s junior year in college. Their 2016 tax liability is $1,000. Under the American Opportunity Credit, they qualify for a credit of $2,500, $1,000 of which is refundable.

Lifetime Learning Credit (LLC)

The LLC allows a maximum credit of up to $2,000 for qualifying educational expenses paid during the tax year for an eligible student enrolled at an eligible educational institution. The lifetime learning credit is calculated as 20% of up to $10,000 of qualified education expenses per return. The credit is non-refundable.

Example: Glenn paid qualified tuition of $20,000. He is eligible for a maximum lifetime learning credit of $2,000 ($10,000 × 20%).

Note: Both the AOC and LLC are subject to different phase-out limitations based on modified adjusted gross income (MAGI).

Who Can Claim the Credits?

In order to claim either credit, qualifying educational expenses must be paid for an “eligible student.” An eligible student can be yourself, your spouse, or your dependent for whom you claim an exemption. The meaning of an eligible student is different for each credit. Below are the general requirements to be considered an eligible student:

AMERICAN OPPORTUNITY CREDIT (AOC)

  • The student must not have had expenses used to figure the AOC in any of the four earlier tax years.
  • For at least one academic period during the tax year the student must meet both of the following requirements:
    1. The student must be a candidate for a degree, certificate, or other recognized educational credential.
    2. The student must take at least one-half of a full work load, which is determined by the school.
  • The student must not have completed the first four years of secondary education.
  • The student must not have a federal or state felony conviction for possessing or distributing drugs.

LIFETIME LEARNING CREDIT (LLC)

  • The student must be enrolled or taking courses at an eligible education institution.
  • The student must be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.

*Keep in mind that unlike the AOC, the LLC can be claimed an unlimited number of times and graduate level students can qualify for the credit.      

For a full list of requirements that must be met to claim the AOC and LLC, please see IRS Publication 970, Tax Benefits for Education.

It’s also important to note that the AOC and LLC can’t be claimed in the same year for the same student. However, you can claim the AOC for one student and the LLC for a different student in the same year.

Note: Beginning in tax year 2016, you must be issued Form 1098-T, Tuition Statement, before claiming either the AOC or LLC. Also, for the AOC, you must report the school’s employer identification number (EIN) in order to claim the credit.

Other Tax Benefits

These credits are not the only education tax benefits available. For example, as an alternative to claiming an education credit, you may claim the Tuition and Fees Deduction. The Tuition and Fees Deduction can reduce the amount of your income subject to tax by allowing up to a $4,000 deduction for qualified educations expenses paid for an eligible student enrolled at an eligible educational institution.

Other relevant tax benefits include savings plans, scholarships, the student loan interest deduction, and the business expense deduction for work-related education.

For more information regarding all the types of benefits discussed here you can go to the Publication 970, Tax Benefits for Education as well as the IRS Information Center for Tax Benefits for Education.

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Jillian Yakominich

Jillian Yakominich

The Tax Institute, H&R Block

Jillian is a tax research analyst and attorney. She is a graduate of the University of Missouri-Kansas City School of Law.