What Are Education Tax Credits, and How Do You Claim Them?
Education tax credits can help those who pay for higher education reduce their tax bill — and, in some cases, get more money in their refund. There are two main types of education tax credits: the American opportunity tax credit and the lifetime learning tax credit.
For most people, the American opportunity tax credit is more valuable, so you’ll want to exhaust your eligibility for that before turning to the lifetime learning credit.
Read on to learn about how much each credit is worth, eligibility requirements and how to claim them.
Table of contents:
- How education tax credits work
- American opportunity tax credit
- Lifetime learning tax credit
- Which education tax credit is best?
- Other education tax benefits
- FAQs about education tax credits
How education tax credits work
If you paid for college during the previous tax year, you may be able claim credits to reduce the amount of income taxes you have to pay.
College students can claim these credits for themselves if they are not claimed as a dependent on anyone else’s tax return. Parents should claim the credits for their dependent students, as long as they meet the income limits. Note that if your filing status is married filing separately, you are not eligible to claim any education credits.
These tax credits apply only to certain costs, officially known as qualified education expenses. Depending on which credit you’re looking at, tuition, required fees and course materials can count toward qualified expenses. You cannot claim tax credits for any expenses paid for with tax-free scholarships, grants or fellowships. (These awards are typically only taxable if they’re awarded in excess of your total qualified education expenses.)
Finally, education tax credits can only be claimed once per year, per student. For example: A college student and their parents can’t both claim the same tax break in the same year, even if they both separately paid the required minimum in qualifying expenses. Similarly, you cannot claim both education tax credits in the same year.
American opportunity tax credit
The American opportunity tax credit, often called the AOTC, is the most generous education tax credit. It is worth up to $2,500 for each eligible student, and it’s partially refundable, meaning that if your tax bill is $0 and you claim the credit, you can get some of that money added to your tax refund. In this case, taxpayers can receive up to $1,000 of the AOTC as a refund.
Who is eligible for the AOTC?
Students are eligible for the AOTC if they’re pursuing a degree or other recognized educational credential. The student must be enrolled at least half time at a qualifying institution. The vast majority of colleges are qualified, but the official rule is that the school is a qualifying institution if it participates in the federal student aid program (in other words, if students at the school can receive federal student loans or Pell Grants).
To claim the maximum credit, single filers need a MAGI of $80,000 or less, while the cutoff for the maximum credit is $160,000 for joint filers. The AOTC phases out between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint filers.
You can only claim the AOTC for the first four years of postsecondary education (even though many students will be in college for five tax years). As such, this credit is primarily intended for students pursuing associate degrees or bachelor’s degrees. If the student had a felony drug conviction in the applicable year, they cannot receive the AOTC.
How to claim the AOTC
To claim the full credit, you need to have spent at least $4,000 in qualifying expenses (the credit amount is equal to 100% of the first $2,000 paid, plus 25% of the next $2,000). Qualifying expenses for this credit are tuition, required enrollment fees and required course materials — not living expenses or transportation.
You’ll receive a tuition statement that outlines what you paid, officially called a Form 1098-T. Colleges typically send these forms to you by the end of January, or you can often find them by logging into the online account where you pay your tuition bills.
When you file your taxes, you need to fill out what’s called a Form 8863 to claim the credit. (If you’re using a tax prep software, the software should prompt you to fill in this information once you answer introductory questions about whether you paid college expenses.)
Lifetime learning credit
The lifetime learning credit (or LLC) is worth up to $2,000. Unlike the AOTC, there is no limit on how many years you can claim the lifetime learning credit.
In theory, an eligible taxpayer could claim the AOTC for the first four tax years of a student's college career and then the LLC for the final semester of senior year (assuming payments for that semester are made after Jan. 1).
Who is eligible for the LLC?
Students may be able to claim the LLC if they were enrolled for at least one academic period at an eligible educational institution during a given tax year. Qualifying schools include all institutions approved to participate in the federal financial aid program. You do not need to be pursuing a degree to get this credit.
To claim the maximum credit, single filers need a MAGI of $80,000 or less, while the cutoff for the maximum credit is $160,000 for joint filers. The LLC phases out between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint filers.
How to claim the LLC
The LLC is equal to 20% of the first $10,000 in qualifying educational expenses, for a maximum credit for $2,000. Qualifying expenses include tuition and required enrollment fees. Course materials are not eligible for this credit.
Your college will issue you a Form 1098-T, which is a tuition statement. These are typically released by the end of January and you’ll often find them in the online portal where you pay tuition bills. If you don’t receive one but you’re confident you paid college expenses during the previous year, contact your college to get a copy.
To claim the credit, you need to fill out a Form 8863 when you file taxes.
Which education tax credit is best?
You cannot claim both education tax credits for the same student in a single year. Because the American opportunity tax credit is worth more money and is partially refundable, it should be your first choice. Here’s a review of the highlights of each credit.
American opportunity tax credit
Lifetime learning credit
What is the maximum credit amount?
$2,500
$2,000
Is the credit refundable?
Partially; up to 40% (or $1,000)
No
What expenses are eligible?
Tuition, fees required for enrollment and required course materials
Tuition and fees required for enrollment
Does the student need to be pursuing a degree or other credential?
Yes
No
What are the income cutoffs?
$90,000 MAGI ($180,000 for joint filers)
$90,000 MAGI ($180,000 for joint filers)
How many years can I claim the credit?
Only for a student's first four years of higher education
Unlimited
Are there enrollment requirements?
Student must have been enrolled at least half time
Student only needs to have been enrolled in one course
Other education benefits to know about when filing taxes
Aside from the American opportunity tax credit and lifetime learning credit, there are a few other educational tax benefits, including a popular student loan interest deduction and tax-advantaged accounts, like 529 plans.
Student loan interest deduction
While credits reduce tax liability dollar for dollar, tax deductions reduce the amount of your earnings that are taxed. So for Americans paying off student debt, the student loan interest deduction can reduce how much they pay in federal income taxes.
Taxpayers can deduct student loan interest they paid on loans taken for themselves, their spouse or their dependent. The maximum deduction is $2,500, and it starts to phase out for taxpayers with a modified adjusted gross income above $70,000 (or $140,000 for married couples filing together). Those with a MAGI of more than $85,000 ($175,000 for married filing jointly) are not eligible for the deduction.
The deduction applies to both federal student loans and private student loans.
Tuition and fees deduction
The tuition and fees deduction expired at the end of 2020. It used to be worth up to $4,000.
529 plans
While different from tax credits and deductions, 529 plans — often called college savings plans — are another education tax benefit. In these plans, you invest after-tax money. When you withdraw your earnings, you don’t have to pay taxes if you use them for qualified expenses.
Note that 529 plans have a broader set of qualified expenses than education tax credits. You can pay for room and board and computers (along with tuition, fees, books and other course materials). You can also use up to $10,000 from a 529 plan to pay for K-12 private school tuition.
For more details about these deductions and other benefits, visit the IRS’s tax benefits for education information center.