A quick lesson on two educational tax credits

July 17, 2024

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Is college worth the cost? It depends.

That’s not a cop out. That’s the finding of a new Pew Research Center survey.

“The public has mixed views on the importance of having a college degree, and many have doubts about whether the cost is worth it,” reports the Washington, D.C.-based nonpartisan organization that follows issues, attitudes, and trends shaping policy.

College survey findings: About a fifth of U.S. adults (22 percent) say the cost of college today is worth it even if someone has to take out loans. Nearly half (47 percent) say it’s worth it only if someone doesn’t take out loans. And 29 percent say it’s not worth it at all.

Since we’re in the midst of presidential conventions, it’s worth noting that political leanings also shaped the survey respondents’ positions.

Republicans and Republican-leaning independents are more likely than Democrats and Democratic leaners to say:

It is not too or not at all important to have a four-year college degree in order to get a well-paying job (50 percent of Republicans vs. 30 percent of Democrats).
A college degree is less important now than it was 20 years ago (57 percent of GOP vs. 43 percent of Dems).
It’s extremely or very likely someone without a four-year college degree can get a well-paying job (42 percent of Republicans vs. 26 percent of Democrats).

Whether you decide college is right for you (or your child), or more direct-to-work training is the preferable route, Uncle Sam might be able to help cover some of the costs.

Even better, he does so via a couple tax credits, the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC).

Two tax-saving college cost credits: The AOC is the one most undergraduate students (or their parents) will claim. It's worth up to $2,500. The LLC is for additional educational costs beyond the first four years, including classes you take after getting out of school. It could save you up to $2,000.

And as tax credits, the savings they can produce will offset any tax you owe dollar-for-dollar. The AOC might even be able to get you a refund if the credit amount is more than you owe.

Here’s a side-by-side look at the AOC and LLC for the 2024 tax year.

Education Tax Credits Comparison
Criteria	American Opportunity	Lifetime Learning
Maximum benefit	Up to $2,500 credit per eligible student. This is calculated as 100% of the first $2,000 you spend on qualifying education expenses, plus 25% of the next $2,000 you spend	Up to $2,000 credit per federal tax return. This is calculated as 20% of the first $10,000 in tuition expenses paid per year, up to a maximum credit of $2,000. This is regardless of the number of individuals for whom you paid qualified education expenses.
Refundable or nonrefundable	40% of credit (up to $1,000) is refundable	Not refundable
Limit on modified adjusted gross income (MAGI) for married filing jointly filers	$180,000 A reduced AOC amount is available when MAGI is more than $160,000 but doesn't exceed $180,000.	$180,000 LLC benefits are phased out for MAGI between $160,001 and $180,000.
Limit on modified adjusted gross income (MAGI) for single, head of household, or qualifying widow(er) taxpayers	$90,000 A reduced AOC amount is available when MAGI is more than $80,000 but less than $90,000.	$90,000 LLC benefits are phased out for MAGI between $80,000 and $90,000.
If married, can you file a separate return?	No
Dependent status	Cannot claim benefit if someone else can claim you as a dependent on their return
Can you or your spouse be a nonresident alien?	No, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status)
Number of years of post-secondary education available	Only if student hasn't completed 4 years of post-secondary education before 2024	All years of post-secondary education and for courses to acquire or improve job skills
Number of tax years benefit available	4 tax years per eligible student (includes any years former Hope Tax Credit, as the AOC previously was known, was claimed)	Unlimited
Type of program required	Student must be pursuing a degree or other recognized education credential	Student does not need to be pursuing a degree or other recognized education credential
Number of courses	Student must be enrolled at least half time for at least one academic period beginning in 2024	Available for one or more courses
Felony drug conviction	Students must have no felony drug convictions as of the end of 2024	Does not apply
Qualified expenses	Tuition, required enrollment fees and course materials needed for course of study	Tuition and fees required for enrollment or attendance
For whom can you claim the benefit?	You, your spouse, or the student you claim as a dependent on your return	You, your spouse, or the student you claim as a dependent on your return
Who must pay the qualified expenses?	You or your spouse, the student, or a third party (such as relatives or friends)	You or your spouse, the student, or at third party (such as relatives or friends)
Payments for academic periods	Made in 2024 for academic periods beginning in 2024 or the first 3 months of 2025
Do I need to claim the benefit on a schedule or form?	Yes. Use Schedule 3 of Form 1040 and Form 8863, Education Credits. See also Form 8863 Instructions.	Yes. Use Schedule 3 of Form 1040 and Form 8863, Education Credits. See also Form 8863 Instructions

MAGI tax magic: The MAGI, or modified adjusted gross income, calculation noted in the table above affects earnings limits on both tax credits.

For most people, MAGI is the amount of adjusted gross income, or AGI, shown on their federal tax return. Specifically, it's line 11 on Form 1040 or Form 1040-SR.

However, if you claim other tax benefits, they affect your MAGI. It's determined by taking your line 11 amount and adding back the following:

Foreign earned income exclusion,
Foreign housing exclusion,
Foreign housing deduction,
Exclusion of income by bona fide residents of American Samoa, and
Exclusion of income by bona fide residents of Puerto Rico.

If you need to adjust your AGI to find your MAGI, worksheets in IRS Publication 970 can help. So can tax software, which most of us use, or your tax professional.

Choose carefully: Finally, carefully compare the two educational tax credits to ensure you use the one that can help you not only pay college costs, but also reduce your tax bill.

If you want more than the comparison table above, check out the IRS' interactive online resource that helps you find out if you're eligible to claim an education tax credit.

Also be careful about the expenses you use to claim each credit. The IRS doesn’t allow tax break double-dipping.

So, while you can claim both credits the same tax return, for example, a parent using the AOC for a daughter's college costs and the LLC for a son's education expenses, you can't claim both credits for the same student or for the same qualified expenses.

Also, if you receive tax-free educational assistance, such as a grant, you need to subtract that amount from your qualified education expenses.

The IRS has a special No Double Benefits Allowed page with more information on claiming one or more education benefits.

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