A Primer On Education Tax Credits

August 15, 2017 : Julieann Wood Riley

When preparing for college, students and parents can easily list the costs like tuition, fees, supplies and room and board. But do you spend enough time considering the tax benefits associated with a college education? Lucky for you there are a number of education tax credits (and deductions). Tune in!

Credits vs. Deductions

First, let’s walk through the difference between tax credits and deductions. A tax credit lowers a tax liability dollar for dollar, while a tax deduction lowers the amount of income of the tax liability. For example, a $1,000 tax credit will lower the amount of taxes due by $1,000. A tax deduction, however will lower the taxable income. This means if the taxpayer is in the 15% tax bracket, their $1,000 deduction will lower their tax liability by $150.

Parents looking at possible education benefits on their tax returns should consider the available education credits: the American Opportunity Credit and the Lifetime Learning Credit. These two credits have similar requirements and qualified education expenses that they will cover, however there are distinguishing traits for each and only once of these credits may be claimed for a qualifying student each year.

American Opportunity Credit

The American Opportunity Credit (AOC) is a tax credit of up to $2,500 for qualifying expenses such as tuition and fees. The credit is available for an eligible student attending an eligible educational institute and is calculated for 100% of the first $2,000 and 25% of the next $2,000 of the student’s expenses. The AOC may be claimed by a taxpayer for fees paid that year from a qualifying student , their spouse, or their dependent. Qualifying students are students in their first four years of post-secondary education, pursuing a degree and are enrolled at least half-time for at least one academic period. The amount of this credit is reduced depending on the taxpayer’s income and can’t be claimed for more than four years. Expenses paid with tax-free funds may not also be used for this credit. Up to 40% of the credit may be refunded to certain taxpayers. Qualifying educational expenses include tuition and required fees as well as course materials that are required as a condition of enrollment or attendance of the school.

Another requirement is that the student can’t be convicted of a felony at the end of the tax year that the credit is claimed for. The taxpayer may not file separately from their spouse, if married, and neither spouse may be a nonresident alien. In general, the taxpayer claiming the credit may not be the dependent of another taxpayer, however if the dependent is not claimed they may still be allowed to claim the non-refundable portion of the credit.

Lifetime Learning Credit

The Lifetime Learning credit (LL) is available for up to $2,000 per year, however this credit may not be claimed in the same year that the AOC is being claimed. Like the AOC, the LL is phased out depending on the taxpayer’s income and the qualifying expenses will be the same and you may claim expenses paid for the taxpayer, spouse, or dependent may also claim the credit so long as the dependent is not claimed by another taxpayer. This credit is not refundable, so it’s limited by the tax liability of the person claiming the credit. Unlike the AOC, the LL isn’t limited to the number of years that it may be claimed, and the student is not required to take a minimum number of classes nor are the classes required to be part of a degree seeking program. Also, a student’s felony conviction will not prohibit the taxpayer from claiming this credit.

Extra Resource: Tuition and Fees Deduction

Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This tax deduction is an adjustment to income, so it will reduce the amount of your income subject to tax. It may be beneficial to you if you do not qualify for the American opportunity or Lifetime Learning credits. While it is not a tax credit, it’s still a tax benefit for students and their parents.

Keep documentation of your educational expenses to help verify the amounts they may use to claim these credits on their return. If you are still confused about the tax credits and deductions available to you, connect with a tax pro at H&R Block!

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Julieann Wood Riley

JulieAnne is a tax research analyst in the Tax Institute. She specializes in the areas of Healthcare and Individual taxation and also focuses on Education Issues. JulieAnne is a graduate of the University of Kansas with a JD.