It's spring break time for many students. But it's also time for a refresher on how the tax code can help them (or their parents who are footing at least some university costs) pay for those classes they're taking a respite from now.
The Internal Revenue Code contains two popular educational tax credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC 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.
Why tax credits rule: The best thing about both of them is that they are tax credits. That means the savings they can produce will offset any tax you owe dollar-for-dollar. And some credits are better than others.
That's the case with the two education tax credits.
If you can claim the LLC's maximum $2,000 amount, this nonrefundable tax credit can zero out your tax liability. But, as the nonrefundable descriptor indicates, if you have any credit left over (for example, you owe $1,800), you lose the excess credit (or, in this example, the $200 extra).
The AOTC, on the other hand, is partially refundable. The maximum possible credit here is $2,500 per student, with 40 percent (up to $1,000) refundable if you have more credit than tax due.
Tax credit crash course: Maybe you plan to use tax software, the tax version of CliffsNotes. Or you've decided to go with a tax tutor, a hired tax professional.
Either option will help you choose the best educational tax credit for your, or your student's, situation. But a little pre-filing homework can help you ace this tax break.
The table below provides a side-by-side comparison of the AOTC and LLC for your 2022 tax year filing.
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Education Tax Credits Comparison |
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Criteria |
AOTC |
LLC |
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Maximum benefit |
Up to $2,500 credit per eligible student. |
Up to $2,000 credit per federal tax return. |
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Refundable or nonrefundable |
40% of credit (up to $1,000) is refundable |
Not refundable |
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Limit on modified adjusted gross income (MAGI) for married filing jointly filers |
$160,000 A reduced AOTC amount is available when MAGI is more than $160,000 but doesn't exceed $180,000. |
$160,000 LLC benefits are phased out for MAGI between $160,001 and $180,000. |
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Limit on modified adjusted gross income (MAGI) for single, head of household, or qualifying widow(er) taxpayers |
$80,000 A reduced AOTC amount is available when MAGI is more than $80,000 but less than $90,000. |
$80,000 LLC benefits are phased out for MAGI between $80,000 and $90,000. |
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If married, can you file a separate return? |
No |
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Dependent status |
Cannot claim benefit if someone else can claim you as a dependent on their return |
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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) |
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Number of years of post-secondary education available |
Only if student hasn't completed 4 years of post-secondary education before 2022 |
All years of post-secondary education and for courses to acquire or improve job skills |
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Number of tax years benefit available |
4 tax years per eligible student (includes any years former Hope Tax Credit, as the AOTC previously was known, was claimed) |
Unlimited |
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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 |
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Number of courses |
Student must be enrolled at least half time for at least one academic period beginning in 2022 |
Available for one or more courses |
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Felony drug conviction |
Students must have no felony drug convictions as of the end of 2022 |
Does not apply |
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Qualified expenses |
Tuition, required enrollment fees and course materials needed for course of study |
Tuition and fees required for enrollment or attendance |
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For whom can you claim the benefit? |
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Who must pay the qualified expenses? |
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Payments for academic periods |
Made in 2022 for academic periods beginning in 2022 or the first 3 months of 2023 |
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Do I need to claim the benefit on a schedule or form? |
Yes, Schedule 3 of Form 1040 and Form 8863, Education Credits; see also Form 8863 Instructions. |
Yes, Schedule 3 of Form 1040 and Form 8863, Education Credits; see also Form 8863 Instructions |
Who can pay the expenses: When it comes to paying for qualified school expenses, both the AOTC and LLC allow for a third party to help here. In these cases, the payments are considered paid by you.
Third parties include generous relatives or friends.
MAGI tax magic: The Internal Revenue Service uses modified adjusted gross income, or MAGI, in connection with 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.
While you can claim both credits the same tax return, for example, a parent using the AOTC 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.
You also might find these items of interest:
- 6 tax-smart financial gifts for grads (and the givers)
- Tax Turkey to Avoid #3: Missing your state's 529 plan tax break deadline
- Make paying for college a family affair, with contributions from parents, kids & Uncle Sam
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