During a recent webinar, officials of the IRS reviewed two education tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. Officials discussed the eligibility requirements for each credit, as well as some of the common errors that taxpayers make with respect to each. The webinar also covered the importance of educational institutions issuing accurate Forms 1098-T Tuition Statement, to both students and the IRS.
IRS officials also noted that Congress had renewed for one more year the “above-the-line” tuition and fees deduction that had expired on December 31, 2013. The deduction can reduce the amount of income subject to tax by up to $4,000 (availability is subject to income limits).
Additional points to note:
- Taxpayers can only deduct qualified education expenses paid during the year for the taxpayer, their spouse or for their dependent.
- Taxpayers cannot claim this deduction if their filing status is married filing separately or if another person can claim the exemption for the student as a dependent on his or her tax return.
- The student cannot take the deduction if they are claimed as a dependent on another person’s return, even if that other person does not actually claim the exemption.
AOTC and Lifetime Learning Credit
The two credits claimed on Form 8863 – Education Credits, are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. The AOTC is the more popular of the two education credits.
The AOTC is available for students enrolled in an accredited four-year college or university. To qualify for the credit, the student must attend at least halftime for one academic period during the year. It may be claimed for four years of post-secondary education. In addition, foreign students do not generally qualify for the AOTC because they are considered nonresident aliens.
According to the IRS, what is meant by four-years is the freshman through senior years in college. You can only take the credit for four years, but the years do not have to be consecutive.
The AOTC credit is worth up to $2,500 dollars per each eligible student and up to 40 percent or a maximum of $1,000 can be refundable under certain conditions. This means that if the taxpayer’s tax liability is zero, they may still get a refund for part of the credit.
The Lifetime Learning Credit also offers valuable cost savings for college students and their families for qualified tuition and related expenses paid to a school. This credit is not limited to expenses paid for undergraduate work like the AOTC. It also includes qualifying expenses paid toward graduate and professional degree courses, including courses to get or improve job skills.
And there is no limit on the number of years the credit can be claimed in a lifetime. However, the credit is only up to $2,000 per tax return (not per student). And unlike the AOTC, it is not refundable.
The type of expenses that may qualify for each credit is different. Basically, the expenses a student is required to pay for courses are eligible for AOTC. This includes tuition, required student activity fees and necessary course books and materials. Non-qualifying expenses for the AOTC include room and board, insurance, medical expenses, including the student health fees, transportation, personal, living, or family expenses and expenses for sports, except where it is part of the student’s degree program.
For the Lifetime Learning Credit, on the other hand, all expenses must be paid to the school in order to qualify for the credit. This includes books, supplies and equipment, in addition to the tuition and fees.
The student did not attend college or a university or other post-secondary educational institution. (No…. it can’t be applied to grade school, middle school or high school education expenses…it must be a post-secondary educational institution).
The student did not pay qualified education expenses or the expenses they claimed did not qualify for the credit or benefit.
The student was a nonresident alien.
The AOTC credit was claimed for more than four tax years.
Only one benefit may be claimed for one student. For example, a single student may qualify for the AOTC, the Lifetime Learning Credit and the tuition and fees deduction at the same time, but may only claim one. It is up to the individual to determine which is the most advantageous. But generally, a refundable credit is worth more than a nonrefundable credit, and either is worth more than a deduction.
With some exceptions, colleges are required to send Form 1098-T, Tuition Statement, to the IRS for most of their students. The Form 1098-T lets the IRS know that the student claimed for AOTC is probably eligible. If the IRS does not receive a Form 1098-T, the IRS may take this as evidence that the taxpayer’s education benefit claim is erroneous.
It is also important to reduce the amount claimed as paid toward education by grants or scholarships received and applied during the year. This is generally noted on the 1098-T is a separate box.