ARE YOU TAKING ADVANTAGE OF EDUCATION CREDITS?

The Lifetime Learning Credit and the American Opportunity Tax Credit have been around for years. Introduced in 1998 and 2009 respectively, they each offer beneficial tax breaks for education expenses related to obtaining higher education (including colleges, universities and trade schools). But how can you use them? Can you?

The American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a tax credit available for qualified higher education expenses. The maximum credit available under the AOTC is $2,500 per student, per year. A student can be you, your spouse, or a dependent claimed on your tax return.

Qualified education expenses include tuition, enrollment fees, and required course materials. Expenses for room and board, transportation, and general living expenses do not qualify.

The credit is only available for the first four years of post-secondary education for each student. Typically that means an undergraduate/trades degree, but there may be exceptions, and it does not need to be consecutive years. Further, the AOTC requires the student to be enrolled as a half-time student or full-time student for at least one academic period in the tax year the credit is being utilized. If a student has used the AOTC credit for four years or the student has already completed four years of post-secondary education, the credit can no longer be claimed for qualified education expenses.

To claim the full tax credit under the AOTC, your Modified Adjusted Gross Income (MAGI) must be $80,000 or less ($160,000 or less if married filing jointly). The credit begins to phase out if your MAGI is over $80,000. You can’t claim the credit if your MAGI is over $90,000 ($180,000 for married filing jointly).

The Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is an alternative tax credit available to offset qualifying educational expenses related to undergraduate, graduate studies, or trades school. The LLC allows a credit of up to $2,000 per return. There is no limit on the number of years you can claim the LLC, but regardless of the number of students claimed on your tax return, the credit is capped at $2,000 per year.

Qualified education expenses include tuition, enrollment fees, and required course materials. Expenses for room and board, transportation, and general living expenses do not qualify.

To obtain the LLC, a student must be enrolled in one or more courses for at least one academic period, a semester for example, in the tax year the credit is being utilized. A student can be you, your spouse, or a dependent claimed on your tax return.

To claim the full tax credit under the LLC, just like the AOTC, your MAGI must be $80,000 or less ($160,000 or less for married filing jointly). The credit begins to reduce if your MAGI is over $80,000. You can’t claim the credit if your MAGI is over $90,000 ($180,000 for married filing jointly).

What credit should you use, the AOTC or the LLC?

You cannot use the AOTC and the LLC for the same student in the same tax year. Choosing between the credits will primarily depend on where the student is at in their education and tax credit use.  You should connect with your tax adviser to assess what the best fit will be for your situation.