Education credit enables people to afford the increasing costs of higher education by reducing the amount of tax owed on their overall tax return. If you’re paying for higher education, the US government grants you aid in the form of an education credit that reduces your tax liability. In other words, the education credits that you receive are adjusted against the tax you owe to the IRS. The best part is that if the credit you receive reduces your tax liability to less than zero, you become eligible for a partial refund, provided you fulfill other requirements.
Types of Education credit
If you are planning for higher education, you become eligible for two types of education credits:
1. American Opportunity Tax Credit (AOTC)
2. Lifetime Learning Credit (LLC)
Let’s take a closer look at what they entail.
American Opportunity Tax Credit (AOTC)
During the first four years of higher education, qualified students can claim education credit of a maximum of $2500. Once the tax has been adjusted, 40 percent of the remaining education credit is refundable. For instance, if you had no tax liability, then the education credit remaining is $2500. The amount refundable is 40% of it, that is $1000. To claim the credit, your modified adjusted gross income (MAGI) should be less than $90,000 for individuals and $ 180,000 for married couples filing jointly.
Lifetime Learning Credit (LLC)
A qualified student enrolled in an eligible educational institute is entitled to receive a financial aid of $2000 per tax return. Students can use this aid to pay for their undergraduate, graduate or professional degree courses. An individual may claim the credit for any number of years provided they do not claim for any other benefit under the same heading as “education credit”, during those years. To claim the credit, the modified adjusted gross income (MAGI) of the applicant should be less than $64,000 for individuals and $ 128,000 for married couples filing jointly.
To be eligible for an education credit, you must meet the below mentioned criteria:
1. Either you, your dependent or a third-party must pay the qualified education expenses (amounts paid for tuition, fees and other related expenses).
2. A student eligible for education credit must enroll at an eligible educational institute (an educational institution qualified to participate in the U.S. Department of Education’s student aid program.
3. The student eligible for exemption must be you, your spouse or any of your dependents listed on your tax return.
There are additional rules for education credit, however, the above three are common to both education credit types.
When Can You “Not” Claim?
You may not be eligible for an education credit claim under the following circumstances:
1. If your name is listed under someone else’s tax return. For example, your parent’s.
2. If your filing status is married filing separately.
3. If you have already claimed a higher education benefit for the same expense.
4. If you or your spouse chose to be treated as a non-resident alien instead of resident alien during any part of the year for tax purposes.
Form 1098-T, also known as “Tuition Statement”, is a tax form that eligible educational institutions file for the students they enroll and for whom a reportable transaction is made. The form shares important information such as the student’s name and social security number. It also gives information about the payments received for qualified tuition, the actual amount billed, scholarships or grants (if applicable) and more such relevant information.
The rules of claiming credits can be tricky and unless you have an in-depth understanding of them. It is advisable to seek expert advice to help you with the process of claiming education credits.