U.S. lawmakers have periodically tried to pass laws that make it easier for citizens to afford the costs of higher education. Those efforts have led to tax code provisions that allow certain education tax credits to help students and their family members reduce how much they owe on their annual tax returns.
Education costs – whether tuition, supplies, or textbooks – can add up quickly, so these credits provide welcome relief for many involved in the higher education system. This guide will walk you through what education tax credits are, the types available, eligibility requirements, and four steps for claiming them.
Understanding Education Tax Credits
Education tax credits allow eligible taxpayers to deduct education expenses related to a student pursuing a degree or taking courses at an institution that qualifies, usually one that participates in the federal student aid program. The students themselves or their parents may be eligible to claim these credits.
Education credits directly lower the tax owed, dollar for dollar, rather than simply deducting the amounts from your income as would a tuition expense deduction or other tax deduction. There are two types of education tax credits: the American Opportunity tax credit and the Lifetime Learning tax credit. Here’s what you need to know about each of them.
American Opportunity Tax Credit
Students who are still in their first four years of post-secondary education may be eligible for this credit. Enrollment doesn’t have to be four continuous years either, so you can take a break between semesters and still retain eligibility. Students must also:
- Be enrolled in at least one semester during the tax year
- Be enrolled at least as a part-time student
- Be in a program at an educational institution that leads to a degree or similar outcome
- Be enrolled in an institution that is part of the Department of Education financial aid program
- Not be a state or federal criminal due to a drug conviction
Expenses included in the American Opportunity credit are:
- Tuition and fee
- Textbooks
- Necessary supplies and equipment to attend the school
The credit does not include expenses such as room and board or transportation. The maximum credit available is $2,500, and you can deduct 100% of expenses up to $2,000, and then 25% of expenses over $2,000. The credit starts to fade out for income between $80,000 and $90,000 for single filers or $160,000 and $180,000 for joint filers, and it is not available for those with incomes over these limits.
Lifetime Learning Tax Credit
The Lifetime Learning tax credit may be another option for you. Students can claim this credit for any course they take, whether or not it is giving them degree credit or leading to a credential. The maximum credit is $2,000 or 20% of up to $10,000 in eligible expenses, which may include:
- Tuition and fees
- Books and supplies necessary for enrollment and purchased from the school
If a book is not required as part of a course, for example, it cannot be included as an expense for this credit. Income limits for the Lifetime Learning credit are as follows:
- The credit starts to phase out between $59,000 and $69,000 for single filers and $118,000 and $138,000 for joint filers
- The credit is unavailable for those making more than these thresholds
Keep in mind that you can only claim one of these tax credits for each student, even if they qualify for both. If you have multiple qualifying students, however, you don’t have to claim the same credit for each of them.
If you are the student and are claiming one of these credits for yourself, you cannot be listed as a dependent on anyone else’s tax return. Make sure you also follow all requirements and steps as listed in the next section.
4 Steps for Claiming the Education Tax Credits
Determining your eligibility is a must before you try to claim the education tax credits. Tax law can be confusing, so make sure you follow these steps carefully or seek expert help if you’re not sure:
1. Use Form 1098-T
You should have received a Form 1098-T, Tuition Statement, from the institution where the student is enrolled. This document reports all tuition and related expenses received and is used by the IRS to verify the numbers you report on Form 8863, discussed later.
2. Determine Which Credit to Take
You may be eligible for both tax credits. The American Opportunity credit may be your best option if you are, since it gives you an additional potential $500 in expense credits. You must choose because, again, you cannot claim both for one student.
3. Calculate Your Education Credit With Form 8863
Complete IRS Form 8863 when you are claiming either education tax credit. Those taking the American Opportunity credit should enter the adjusted education expenses from the tuition tax document in line 27 on Form 8863. This information will be entered in line 31 if taking the Lifetime Learning credit. Follow the prompts on the tax form and the Form 8863 instructions document to calculate your education credits based on the data provided in your Form 1098-T.
4. File Form 8863 With Your Tax Return4.
File form 8863 with your tax return to the IRS once you have determined your education tax credit. Make sure you file by the tax deadline.
Either of these education credits can help you save money on your tax return as a student or parent. Make sure to carefully review the information on the Form 1098-T you receive from the educational institution to ensure that your personal information and expense details are accurate to avoid costly mistakes or issues with the IRS.
Questions about Education Tax Credits?
The right tax professional can help you determine your eligibility for these education tax credits and guide you through the process of claiming them. If you are a student or the parent of a student, you don’t want to miss out on the savings these credits can provide when filing your annual tax return.
Reach out to Silver Tax Group to speak to a tax expert about the American Opportunity or Lifetime Learning tax credit, or any other tax-related question you may have.
