Education Tax Credit

What is an Education Tax Credit?

Education tax credits are available for taxpayers who pay qualified higher education expenses for an eligible student to an eligible educational institution, such as a college or university. The two types of education tax credits are the American opportunity tax credit (AOTC) and the lifetime learning credit.

How Education Tax Credits Work

Education tax credits may be claimed by those who incur qualifying educational expenses, such as tuition and fees. Parents who pay these expenses for their children may be able to claim this type of credit on their tax returns, subject to certain income restrictions.

There are two types of education tax credits: the American opportunity tax credit (AOTC) and the lifetime learning credit. The AOTC applies to the first four years of postsecondary education, with certain restrictions. The lifetime learning credit applies to all students at the undergraduate or graduate level. You cannot claim both the AOTC and lifetime learning credits for the same student in the same tax year.

Requirements for the Education Tax Credits

Both credits have their own eligibility rules in addition, but a taxpayer must meet all three of these requirements for both.

1. You, your dependent, or a third party must pay qualified higher education expenses.
2. You, your spouse, or a dependent listed on your tax return qualify as an eligible student.
3. The eligible student (above) must be enrolled at an eligible educational institution.

The American Opportunity Tax Credit  (AOTC)

The American opportunity tax credit (AOTC) is for eligible students who have not yet completed the first four years of higher education. They must not have claimed the AOTC or former Hope credit for more than four tax years. The student must be enrolled at least half time for one academic period, as determined by the school, during the tax year. Additionally, they must not have a felony drug conviction as of the end of the tax year.

There are income limits for claiming the AOTC. For 2020, the credit begins to phase out at a modified adjusted gross income (MAGI) of $80,000 for single filers and $160,000 for married taxpayers filing jointly (MFJ). Single taxpayers with a MAGI of more than $90,000, or MFJs with a MAGI over $180,000, cannot claim the credit.

Eligible students can claim 100% of the first $2,000 spent on school expenses and another 25% of the next $2,000. The maximum amount an eligible student can claim is, therefore, $2,500: (100% x $2,000) + (25% x $2,000). In other words, the maximum $2,500 AOTC can offset $4,000 spent on qualified higher educational expenses.

The AOTC is a partially refundable tax credit. This means, if the credit reduces your tax burden to less than zero, the Internal Revenue Service (IRS) will send you a check for up to 40% of the remaining credit. The maximum refundable portion of the credit is, therefore, $1,000 (40% x $2,500).

The Lifetime Learning Credit

The lifetime learning credit has broader eligibility requirements than the AOTC, as it is intended for taxpayers at all education levels. The lifetime learning credit can be used for a wide range of schools, including vocational training or professional degree courses, as well as for tuition at more traditional four-year undergraduate and graduate schools.

To be eligible for the lifetime learning credit, a student must be enrolled in a course to earn education credits or improve job skills at an eligible educational institution for at least one academic period, as determined by the school. The student will receive a Form 1098-T, Tuition Statement, from the education institution if it is an eligible school as defined by the IRS.

There are income limits for claiming the lifetime learning credit. For 2020, the credit begins to phase out at a modified adjusted gross income (MAGI) of $59,000 for single filers and $118,000 for married taxpayers filing jointly (MFJ). Single taxpayers with MAGI over $69,000, or MFJ with a MAGI over $138,000, cannot claim the credit.

Eligible students can claim 20% of the first $10,000 of qualified education expenses. The maximum amount an eligible student can claim is, therefore, $2,000: (20% x $10,000). The lifetime learning credit is not refundable. This means, the credit can reduce your tax liability to zero, but it cannot be refunded to you beyond that point.

Criticisms of Education Tax Credits

Critics of subsidies for higher education have long argued that education tax credits are one reason the cost of higher education has been rising many times faster than inflation. According to these critics, education tax credits simply raise the overall cost of college without an actual increase in access to it. Tax credits make more money available for spending on education, but do nothing to increase the supply or quality of schooling. 

What are major differences between the AOTC and lifetime learning credit?

The AOTC has a maximum of $2,500, and the lifetime learning credit maximum is $2,000. The AOTC phases out at a higher MAGI threshold than the lifetime learning credit. Both credits cannot be claimed in the same tax year for the same student.

The AOTC can only be used for undergraduate expenses, while the lifetime learning credit is more flexible. The AOTC can only be claimed for four tax years; the lifetime learning credit can be claimed an unlimited number of times.

The AOTC requires the student to be enrolled at least half time for an academic period, while the lifetime learning credit is available to students enrolled in at least one course for an academic period.

Students cannot have a felony drug conviction and claim the AOTC. This is not a requirement for the lifetime learning credit.

Is my vocational school an eligible educational institution for the lifetime learning credit?

Yes, your vocational school may count as an eligible educational institution for the lifetime learning credit. If your school is eligible, you will receive a Form 1098-T from your school in the mail before you file your taxes.

What if I don't receive a Form 1098-T from my school?

If you do not receive a Form 1098-T, contact your school. Similarly, if you believe the amount listed on your 1098-T is incorrect, contact your school.