Each year, countless taxpayers miss out on relevant education credits simply because they aren’t familiar with the benefits offered through this program. Education credits were designed to help defray the high (and constantly rising) costs associated with higher education by minimizing tax burden obligations on your filed return. Many people don’t realize that there are two specific education credits available to them: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC). Understanding some of the details and requirements of the education credit can make a significant impact on what you’ll pay each year, and in some cases, may even help you receive a refund.
American Opportunity Tax Credit (AOTC): What You Need To Know
Some key components of the American Opportunity Tax Credit (AOTC) include:
Students who are eligible for the AOTC may receive a maximum of $2,500 for the first four years of higher education.
To establish eligibility for the AOTC, the student must:
- Be completing a degree or other designated higher education program
- Show proof of enrollment for at least half time and at one academic period starting in the tax year
- Not have completed the initial four years of higher education at the onset of the tax year
- Not have previously filed for the American Opportunity Tax Credit or the former Hope credit for more than four tax years
- Not hold a felony drug conviction at the end of the tax year
Typically, students eligible for this tax credit will receive a Form 1098-T Tuition Statement from their school by January 31st. The amount in Box 1 of Form 1098-T outlines the totals received during the year. However, it’s important to note that the amount in Box 1 may not be the amount a student can actually claim. Individuals taking the credit should review the qualified expenses or consult with a qualified tax accountant for more information on what you can claim. To file the claim, taxpayers must complete Form 8863 and attach the completed form to your Form 1040.
Like most tax programs, the AOTC does have limitations. Students are not allowed to claim this credit if their modified adjusted gross income exceeds $90,000 for single filers and $180,000 for joint filers.
Potential For Refunds
Many taxpayers wonder if they are able to take advantage of the AOTC if they don’t owe any taxes in a given year. The answer? Absolutely. If the credit lowers your tax burden to zero – or if you don’t owe any tax to begin with, you are able to have 40% of any remaining amount of the credit (up to $1,000) refunded to you.
Lifetime Learning Credit (LLC): What You Need to Know
Value of the LLC
The value of Life Learning Credit is 20% of the first $10,000 of qualified education expenses or a max of $2,000 per return.
To establish eligibility for the LLC, a student must
- Be enrolled or taking courses at an eligible educational institution.
- Be taking higher education course/courses to obtain a degree or other recognized education credential or to improve job skills
- Be enrolled for at least one academic period beginning in the tax year
There are two restrictions with the Life Learning Credit based on adjusted gross income:
- The credit begins to phase out if your modified adjusted gross income falls between the range $57,000 and $67,000 for single filers ($114,000 and $134,000 if you file a joint return)
- The second limitation is met if your modified adjusted gross income exceeds is $67,000 ($134,000 or more if you file a joint return)
Claiming the Credit
Taxpayers are able to claim the credit the same way as when claiming the American Opportunity Tax Credit
Potential For Refunds
Unfortunately, if you don’t owe any taxes, you cannot take advantage of the credit. You can use the credit to pay any tax you owe. However, the Lifetime Learning Credit is not refundable.
Don’t navigate through Education Credit legislation on your own. Contact Leone, McDonnell and Roberts today to help optimize your credits and benefits this tax season.