Are You Missing Out on Education Tax Credits?

The costs of higher education are a major pain point for students and young workers. Working part or full-time while going to school, opting for a cheaper university, or applying for scholarships and grants can make things more affordable. But there's another option you may not have considered.

The IRS offers education tax credits that can reduce the amount you owe in income taxes if you paid for higher education throughout the year. We'll look at two of the most popular credits below.

American Opportunity Tax Credit (AOTC)

Here's what you need to know about the American Opportunity Tax Credit (AOTC).

Who qualifies?

You can qualify for the AOTC if you or a child you're claiming as a dependent meets the following criteria:

• The student has a valid Social Security number or individual taxpayer identification number (ITIN) by the due date of your tax return.
• The student is pursuing a degree or other recognized education credential.
• The student was enrolled at least half-time for at least one academic period (semesters, trimesters, quarters, etc.) during 2023.
• The student was still in your first four years of higher education at the beginning of 2023.
• The student has not claimed the AOTC or the former Hope tax credit for more than four years.
• The student has not had a felony drug conviction by the end of 2023.
• Your modified adjusted gross income (MAGI) is $90,000 or less ($180,000 or less for joint filers).

How much is it worth?

The maximum AOTC is $2,500 per student. You get a 100% credit for the first $2,000 spent on qualified education expenses during 2023 and a 25% credit for the next $2,000 spent on education expenses. However, those with high incomes may receive a reduced credit.

This is a partially refundable tax credit. If it brings your total tax bill to zero, you can have up to 40% of the remaining amount (up to $1,000) refunded to you.

How to claim

To claim the AOTC, you'll need to fill out Form 8863 and submit it with your return. You should have gotten a Form 1098-T from your university by Jan. 31, 2024 that contains the information you need. If you haven't gotten it yet, reach out to your university's registrar's or bursar's office.

Your tax preparer or tax-filing software will ask you questions about whether you paid for higher education expenses throughout the year. If the answer is yes, it should prompt you to enter the information from your Form 1098-T to claim your AOTC.

Lifetime Learning Credit (LLC)

Here's what you need to know about the Lifetime Learning Credit.

Who qualifies?

You qualify for the LLC for the 2023 tax year if you meet the following criteria:

• You, your dependent, or a third party paid qualified education expenses during 2023 for undergraduate, graduate, or professional degree courses.
• The student was enrolled at an eligible higher education institution for at least one academic period during 2023.
• The student is yourself, your spouse, or a dependent listed on your tax return.
• Your MAGI is $90,000 or less ($180,000 or less for joint filers).

How much is it worth?

The LLC is worth a maximum of $2,000 per return. You get a 20% credit on up to $10,000 of qualified educational expenses. Unlike the AOTC, this tax credit is nonrefundable. It can lower your tax bill to zero, but the IRS won't pay you any remaining credit in the form of a refund.

How to claim

Claiming the LLC follows the same process as claiming the AOTC. You'll need the information from your Form 1098-T. Provide this to your tax preparer or enter it into your tax-filing software and follow its prompts.

Can you claim both?

The IRS doesn't permit you to claim the AOTC and the LLC for the same student in the same tax year. It is possible to claim both credits for two different students, though. One may qualify for the AOTC and another for the LLC. Or the same student could claim the AOTC one year and the LLC the next.

Your tax preparer or tax-filing software should assist you in choosing the best credit to claim if you have to choose one. If you have any questions about education tax credits on your 2023 tax return, consult an accountant who can provide you with personalized advice.