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Who wouldn’t like to pay a little less income tax? If you’re currently attending college, or have a child in college, you may be eligible for one of two important tax credits that can help offset the costs of higher education.
A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. Reducing the amount you owe Uncle Sam each year could mean putting money back in your pocket that you can use to pay for education costs.
Here’s how education tax credits work, how to know if you’re eligible for one, and what to do to claim any credit you qualify for.
- The 2 education tax credits
- American opportunity tax credit (AOTC)
- Lifetime learning credit (LLC)
- Other tax breaks to consider
The 2 education tax credits
When you file your taxes, you may be eligible to claim the American opportunity tax credit or the lifetime learning credit. Here’s an overview of the two:
|What to know for 2021 taxes||American opportunity tax credit (AOTC)||Lifetime learning credit (LLC)|
|Maximum credit amount||$2,500 per eligible student||$2,000 per tax return|
|Number of years you can claim||4 years per eligible student||No limit|
|Refundable?||Yes, 40% of the credit amount (up to $1,000)||No|
American opportunity tax credit (AOTC)
The AOTC is available for the first four years of your college education, so if you qualify for it, you (or your parents, if you’re a dependent) could claim it while you’re still in school.
Maximum available amount
The AOTC is worth a maximum of $2,500 — 100% of the first $2,000 of your qualified education expenses and 25% of the next $2,000. That amount is per eligible student each year the student qualifies. That means if you’re a parent with a college freshman and a college senior, and you’re eligible for the full credit amount, you could claim $5,000 for the AOTC.
Eligible expenses for claiming the AOTC
To claim the AOTC, you must have paid eligible education expenses for yourself, your spouse, or a dependent whom you claim on your tax return. Eligible expenses include:
- Qualified tuition to attend an eligible educational institution
- Any fees required to enroll in the school (for example, if your school requires you to pay for a meal plan)
- Required course materials, like textbooks
Who qualifies for the AOTC?
Not everyone can claim the AOTC. Generally, you may qualify for the credit if:
- You paid eligible higher education expenses for yourself, a spouse, or dependent. This means either a parent or student can qualify, depending on who paid the student’s college tuition. But a student can’t claim the AOTC if their parents claim them as a dependent — even if the student files their own tax return.
- You haven’t completed four years of school. If you’re in grad school, or are taking a bit longer to complete your undergraduate degree, you can’t claim the AOTC. But you may be able to qualify for the lifetime learning credit.
- You’re pursuing a degree or other education credential. You can’t qualify for the AOTC if you’re taking a class for fun.
- You’re enrolled at least half-time. If you’ve only been taking a course or two per semester, you won’t qualify for this credit.
- Your MAGI doesn’t exceed the stated limits. If your MAGI exceeds the limits, you won’t be eligible to claim the AOTC.
Is the AOTC refundable?
The AOTC is a refundable tax credit. That means if your credit brings the amount of tax you owe to zero, you can get money back in the form of a tax refund. For the AOTC, you can get 40% of your total credit amount refunded — up to $1,000 maximum.
Here’s an example of how it can work:
|2021 tax obligation||$1,500||$0|
|Amount of AOTC you qualify for||$2,500||$2,500|
|Remaining credit amount||$1,000||$2,500|
|Refundable amount of credit||$400 (40% of $1,000)||$1,000 (40% of $2,500)|
How to claim the AOTC
- By Jan. 31, your college should send you a Form 1098-T Tuition Statement for tuition and other education expenses you paid during the previous year. Hold onto it until tax season.
- When you’re ready (or your parents if they claim you as a dependent) to file your federal 1040 income tax return, you’ll use IRS Form 8863 to calculate and claim your AOTC and other education credits. You’ll use information from your 1098-T to complete Form 8863.
- Prepare and file your return. You can have a qualified tax professional do this for you, or you can use DIY tax software.
Lifetime learning credit (LLC)
If you’re paying for graduate school or taking professional courses, you may be eligible for the lifetime learning credit. Unlike the AOTC, the lifetime learning credit has no limit on the number of years you can claim it.
Maximum available amount
The most you can claim for the LLC is $2,000 per tax return. This means if you’re a parent with two dependent children in graduate school, the most you could qualify for is $2,000, regardless of how much tuition and education-related expenses you actually paid.
As with the AOTC, your MAGI also affects the amount of credit you can claim.
Eligible expenses for claiming the LLC
The LLC won’t cover as much of your college expenses as the AOTC does. LLC expenses generally include:
- Fees required to enroll in school
- Fees required to attend your college
To claim the credit, you must have paid eligible education expenses for yourself, your spouse, or a dependent whom you claim on your tax return.
Learn More: Do Student Loans Count as Income on My Taxes?
Who qualifies for the LLC?
You may be able to claim the LLC if:
- You’re enrolled in grad school and taking one or more courses.
- You’re taking one or more courses to improve your job skills.
- You don’t have to be pursuing a degree or other education credential.
- Your MAGI is within the income limits.
- You’re paying eligible expenses for a dependent student who meets the other requirements for claiming the LLC.
Is the LLC refundable?
The lifetime learning credit isn’t refundable — even if claiming it reduces your tax obligation to zero. Here’s an example of how the LLC could work:
|2021 tax obligation||$2,000||$0|
|Amount of LLC you qualify for||$2,000||$2,000|
|Remaining credit amount||$0||$2,000|
|Refundable amount of credit||$0||$0|
How to claim the LLC
The process for claiming the LLC is the same as for claiming the AOTC. You’ll complete and file Form 8863 with your federal tax return, using information from your 1098-T.
When you’ve exhausted aid options, like scholarships, grants, and federal student loans, private student loans can help pay for college. The companies in the table below are Credible’s approved partner lenders. Whether you’re the borrower or cosigner, Credible makes it easy to compare rates from multiple private student loan lenders without affecting your credit score.
|Lender||Fixed Rates From (APR)||Variable Rates From (APR)|
|4.50%9 - 15.49%9||6.37%9 - 16.70%9|
Lowest APRs reflect autopay, loyalty, and interest-only repayment discounts where available. Prequalified rates are not an offer of credit. | 10Ascent Disclosures | 1Citizens Bank Disclosures | 2,3College Ave Disclosures | 11Custom Choice Disclosures | 7EDvestinU Disclosures | 8INvestEd Disclosures | 9Sallie Mae Disclosures
Other tax breaks to consider
The federal government offers multiple tax breaks that can help make college more affordable. You can learn more about them in IRS Publication 970.
Education tax credits provide dollar-for-dollar reductions in your tax obligation. Tax deductions, like the student loan interest deduction, can lower your tax bill by reducing your taxable income. College savings plans allow you to save, invest, and enjoy tax-free growth, and then withdraw the money tax-free to pay for qualified education expenses.
- Student loan interest deduction — If you paid interest on a qualifying student loan, and meet income limits for the deduction, the student loan interest deduction could reduce your taxable income by up to $2,500.
- 529 plans — Established and run by states, 529 plans allow you to either save for future college expenses or prepay college expenses. The money you invest in a 529 isn’t tax deductible. But you won’t pay tax on the gains, and your withdrawals won’t be taxed as long as you use the money to pay for qualifying education expenses.
- Coverdell education savings accounts — You can use a Coverdell account to pay for higher education or certain elementary and high school expenses. You’ll need to meet income limits to be eligible for the account, and you can only contribute $2,000 per year per student. Like 529s, Coverdells aren’t tax deductible, but you won’t pay taxes on the growth or on distributions as long as you use them for qualified education expenses.