Education Tax Credits and Deductions 101: What to Know

It’s already that time of year again – back to school! Now is the perfect opportunity to discuss educational credits and deductions, which can help reduce the often high cost of higher education and make it more affordable.

The two educational credits you need to know about are the:

  • American Opportunity Tax Credit (AOTC)
  • Lifetime Learning Credit (LLC)

In the past few years, there have been changes to the tax credits for higher education expenses. The American Opportunity Tax Credit (AOTC) was made permanent under the Protecting Americans Against Tax Hikes (PATH) Act of 2015.

What’s the Difference Between the AOTC and LLC?

For an easy-to-read, clear reference on similarities and differences between the AOTC and LLC, check out this useful IRS chart here.

As a quick summary, here are some key highlights:

  • The AOTC offers a max credit of up to $2,500 credit per eligible student; the LLC offers up to a $2,000 credit per return.
  • With the AOTC, 40% of credit is refundable; the LLC is non refundable.
  • For both, you’re not eligible to take the credit if you are claimed as a dependent on someone else’s return.

The IRS also points out some interesting facts about the AOTC that makes it different from other education tax credits:

  • It’s permitted for expenses related to course textbooks, supplies and equipment that “are not necessarily paid to the educational institution but are needed for attendance.”
  • Taxpayers can claim the credit for four tax years, in contrast to the LLC where there is no limit on the number of years you can claim it.

Expenses That Don’t Qualify for a Tax Credit

Certain expenses do not qualify for either the AOTC or the LLC. The IRS names the following expenses that cannot be claimed: 

  • Room and board
  • Transportation
  • Insurance
  • Medical expenses
  • Student fees, unless required as a condition of enrollment or attendance
  • Same expenses paid with tax-free educational assistance
  • Same expenses used for any other tax deduction, credit or educational benefit

Especially at this time of year, many students wonder if a computer purchase can qualify for the AOTC. The IRS official answer? That depends. “The amount paid for the computer can qualify for the credit if you need the computer for attendance at the educational institution,” explains the IRS website.

Also note: “Expenses for sports, games, hobbies or non-credit courses do not qualify for the education credits or tuition and fees deduction, except when the course or activity is part of the student’s degree program. For the Lifetime Learning Credit only, these expenses qualify if the course helps the student acquire or improve job skills.”

Can You Claim an Education Tax Credit?

Many of my clients want to know if they’re eligible to claim an education credit. Though there are additional requirements, the three main criteria according to the IRS are:

  1. You, your dependent or a third party pays qualified education expenses for higher education.
  2. An eligible student must be enrolled at an eligible educational institution.
  3. The eligible student is yourself, your spouse or a dependent you list on your tax return.

The IRS has a great reference that highlights common mistakes taxpayers make when claiming education credits. These include:

  • Students who are listed as a dependent or spouse on another tax return
  • Students who don’t have a Form 1098-T proving they attended an eligible educational institution
  • Students who are not paying qualified education expenses
  • Returns that claim the credit for a student not attending a college or other higher education

Did you know? The IRS says “You cannot claim a credit for education expenses paid with tax-free funds. You must reduce the amount of expenses paid with tax-free grants, scholarships and fellowships and other tax-free education help.”

Pro tip: This 10 minute interview on the IRS website can help you figure out if you’re eligible to take advantage of educational credits or deductions, such as the American Opportunity Credit, the Lifetime Learning Credit, and the Tuition and Fees Deduction.

What About Other Education Tax Deductions?

If you’re wondering what the difference is between a tax credit and a deduction, it’s simple:

  • A credit lowers the amount of income tax you may owe.
  • A deduction lowers the amount of your income subject to tax, and may thus reduce the amount of tax you owe.

We’ve covered the two main education tax credits already above, but there are also many deductions you may also be eligible for.

Here are some of the most common:

  • Tuition and fees
  • Student loan interest
  • Qualified student loans
  • Qualified education expenses
  • Work-related education expenses
  • Education required by your employer or by law
  • Education needed to improve, maintain, or learn new skills

If you are an employee, these expenses are NO longer deductible if not reimbursed by your employer. This is due to recent changes in the tax law. The 2% AGI itemized deductions are no longer available. If you are self-employed, then there is a much better chance for a deduction.

For a very comprehensive reference, I suggest visiting the IRS Tax Benefits for Education Information Center, where you’ll find a wide range of knowledge at your fingertips.

Have questions about what educational credits and deductions you might be eligible for? Let’s chat! Together, we’ll review your unique situation to make sure nothing is overlooked. Reach me at 207-522-1014 or email anytime.

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