Available Tax Credits for Education

For students looking to pay for college, finding ways to reduce the amount of taxes owed is a great way to save money that can be put towards the costs of higher education and avoiding student loans.

There are multiple tax credits that students and their families can apply during tax season if they have made payments toward qualified education expenses in the last tax year and a student is seeking a degree or recognized educational credential.

What Are Education Tax Credits?

Education tax credits are reductions to a person's tax bill if they have made payments for postsecondary education tuition or related expenses, such as course materials and books. These tax credits aren't only related to the person filing. A single filer, a dependent child, or a married filing jointly spouse attending an eligible educational institution all qualify for these credits.

How Do I Claim Education Expenses on My Taxes?

If you or an eligible family member has made qualified tuition payments to a higher education institution, you can claim education expenses on your taxes. To claim these expenses, you'll need Form 1098-T, which will be issued by the school that you or your eligible family member attends. This form will have relevant information you need to file your taxes or to give to your tax preparer.

What Is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit is one of the two most common tax credits available to students or their families. The AOTC is also sometimes called the American Opportunity Credit. The AOTC is a tax credit that caps at $2500 per eligible student in a single year claimed by the student or a family member claiming them as a dependent or spouse can claim this credit. To apply for the credit, a 1098-T form from the eligible school is required.

AOTC Eligibility

For tax filers to be eligible for the AOTC, there are multiple criteria that they must meet.

One of the biggest requirements is that the filer, their spouse, or one of their dependents must have current or recent enrollment in qualified education institutions. For the AOTC to be claimed, education payments must have been made within the tax year that is being filed, so even if your schooling was completed in the last tax year, but no payments were made during that academic period, then there wouldn't be eligibility.

Although there is a $2,500 maximum, not everyone who claims the credit will receive the full $2,500. The credit is calculated based on 100% of the first $2,000 spent on higher education and 25% of the next $2,000, which is why the maximum is $2,500. For students who attend a college or university at least half-time, there is a high likelihood that they will be able to claim the full credit.

However, for some online programs, community college courses, or part-time students this threshold might be harder to cross.

Another factor that impacts eligibility is the total income of the household trying to claim the credit. To be eligible for this credit, household income needs to be under $80,000 for a single filer or $160,000 for married filing jointly taxpayers.

What Is the Lifetime Learning Credit (LLC)?

Much like the AOTC, the Lifetime Learning Credit offers up to $2000. The LLC has no limit on the number of years that the credit can be claimed in qualifying situations, so the credit can be applied for both undergraduate and graduate students.

Unlike the AOTC, the LLC is limited to a $2000 maximum for a single tax return, not based on qualified students. With the AOTC, multiple children in school at the same time will all be eligible for the credit, but the LLC would only allow for the family to claim one credit.

LLC Eligibility

The LLC has several eligibility requirements for taxpayers looking to claim the credit. Like the AOTC, there is a cap on income that a person or household can have to be eligible for the credit. For a single filer, the yearly income cap is $80,000 and married-filing jointly must have less than $160,000 in taxable income for the year.

The LLC also is negated by college savings plans if you are trying to apply them to the same costs. One way to work around this is to apply your Lifetime Learning Credit to education and college savings plans, like a 529 plan, to expenses that aren't covered by the LLC. Finally, the higher education expenses must be incurred by the filer or one of their qualified dependents.

AOTC vs. LLC

Although the two credits have many similarities when it comes to eligibility requirements, there are differences in terms of benefits that will make the AOTC or LLC better for your tax filing. Both the AOTC and LLC have similar maximums, but the AOTC isn't limited by claims per tax return like the LLC is. For families with multiple learners at the same time, the AOTC will provide better benefits.

How To Maximize Tax Benefits as a College Student

There are many tax benefits for college students, even ones that don't have to file income taxes.

To make the most of these benefits, follow these steps:

• if you file taxes, even with no income, you might qualify for 40% of the AOTC ($1000) which can be added to a tax refund
• understand your family's modified adjusted gross income (MAGI), this will affect your eligibility for the credits based on income limits and maximums
• review any savings plans you're using, like 529 plans or IRAs to make sure you will be eligible come tax season

Tax Deductions vs. Tax Credits: What's the Difference?

Both deductions and credits reduce your tax liability but in different ways. A tax credit reduces how much you owe on taxes, much like applying a gift card to a bill at a restaurant. The total bill is still the same, but what you owe out of pocket will be reduced.

A deduction, on the other hand, adjusts the 'top line' of your tax bill by reducing the amount of income that is used to calculate your taxes. Instead of applying to the end total, deductions change it.

FAQs About Education Tax Credits

Tax credits and deductions can be difficult to comprehend and many students and their families have questions about how to use tax credits.

Can I Claim an Education Credit on My Taxes?

To claim an education credit you must meet a few specific criteria. First, your household's MAGI must be under the maximums detailed for the respective credit. You also need to have made qualified payments in the tax year that is being filed. Lastly, either you must be the student, or your spouse or a dependent must be a student. As long as all of these criteria are met, you can claim an education credit.

How Do I Get the Full $2,500 American Opportunity Credit?

To get the full $2,500, you must have at least $4,000 in college expenses and a MAGI of under $80,000 if you're a single filer or $160,000 for married filers. The calculation for the AOTC is 100% of the first $2,000 and 25% of the second $2,000, which totals $2,500. If expenses are below this threshold, you'll only receive proportional credit.

What Is the $1,000 Tax Credit for College Students?

The $1,000 tax credit is calculated as 40% of the AOTC. The reason that only 40% can be claimed is that this version of the credit is for students with no income. The full $2,500 credit is applied to income tax, which unemployed or part-time students might not qualify for.

What Are the Income Limits for Education Tax Credits in 2024?

For both the AOTC and LLC, the income limits are extremely similar. Calculating your household's MAGI is the first step to determining eligibility for partial or full credit. To claim these credits, a single-filer household can't have income over $80,000 and for married filing jointly households the income limit is $160,000.