Two education credits are available to taxpayers (directly or via their dependents) that paid qualified expenses for themselves, a spouse, or a dependent to enroll in an eligible educational institution1: the American Opportunity Credit and the Lifetime Learning Credit.
American Opportunity Credit: This credit is worth up to $2,500 per student and is limited on a per-student basis. It only covers the first four years of post-secondary education by a student. Each student may receive a credit equal to 100% of the first $2,000 of qualified expenses paid and 25% of the next $2,000 of qualified expenses paid. Once the credit is fully exhausted on behalf of a particular student it cannot be claimed again in any subsequent year.
Lifetime Learning Credit: This credit is worth up to $2,000 per year and is limited on a per-household basis (may be claimed on behalf of one child or many children within the household). It is only available to those students who are not eligible to take the American Opportunity Credit. This credit, though, is available for an unlimited number of years so long as the student(s) attends a post-secondary educational program. Each household may receive an annual credit equal to 20% of the first $10,000 paid for eligible education expenses for all eligible students.
NOTE: Either the American Opportunity Credit or the Lifetime Learning Credit can be claimed for each eligible student, but taxpayers cannot claim both credits for the same student within a single year.
Qualifying Expenses: Eligible expenses include tuition-related expenses required for enrollment or attendance at an eligible educational institution. More specifically, tuition fees, student activity fees, and course-related book, supplies, and equipment expenses are considered qualifying expenses. Additionally, these expenses must be paid directly to the institution as part of enrollment or attendance requirements (except for books, supplies, and equipment). Finally, qualifying expenses must be paid with personal funds (which do not include funds received from a tax-free scholarship, fellowship, grant or through an employer-provided education assistance program). Room and board, insurance premiums, transportation expenses, and medical expenses are not qualifying expenses.
Other Requirements: If any of the following conditions apply, the taxpayer is not entitled to take either education credit:
-Taxpayer and/or spouse (if filing jointly) are claimed as a dependent on someone else’s tax return.
-Taxpayer’s filing status is married filing separately.
-Adjusted Gross Income (Line 38 on Form 1040) is $90,000 or more ($180,000 or more if married filing jointly).
-Taxpayer is taking a Tuition and Fees deduction for the same student on Line 34 of Form 1040.
-Taxpayer and/or spouse was a non-resident alien for any part of the tax year (unless filing status is married filing jointly).
To formally claim either credit, taxpayers must complete Form 8863 and attach it to their tax return.
1An eligible educational institution is a college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administrated by the Department of Education.
Photo by: Ed Uthman