If you or someone from your close circle wants to go to college then you must be familiar with the fact that college fees are more expensive than ever. The sum of the board & room, tuition, and other fees on an average exceed 27000 USD for an in-state college. With this hike in tuition fees, college education goes out of reach of an average-income family but there are certain tax benefits that can help make higher education affordable.
Taxpayers can avail of two types of credits for education: 1) American Opportunity Tax Credit (AOTC) and 2) Lifetime Learning Credit (LLC).
Further details about each type of credit are discussed in the sections below:
The American opportunity tax credit (AOTC)
Students who meet the criteria can avail this tax credit for the first four, instead of two, years of their college education. For a single student, the credit amount can be as much as $2500 per year. In 2009, AOTC came as the replacement for Hope Credit. AOTC can be claimed on the Tax return of a student if he/she is supporting themselves with the education expenses, a parent or guardian who claims the student as a dependent, or a spouse supporting the student with their higher education tuition and other fees. AOTC can be claimed for the tuition fees of post-secondary education only.
Any expenses related to insurance, room & board, or medical do not qualify for this category hence can not be claimed with AOTC.
The AOTC is partially refundable. If the credit ends up bringing the due tax amount down to zero, then you can claim 40% of the remaining amount of the credit refunded to you and this can be up to $1,000. It covers a 100% credit of the first $2K of fees that satisfies the eligibility criteria whereas the next $2K of the qualified tuition fees will be covered quarterly i.e., 25% for the same student.
How to determine the eligibility?
The following criteria decides whether a person is eligible for AOTC:
● The taxpayer or the dependent is enrolled in a program leading to a degree, certificate, or any other post-secondary education credentials during the tax year.
● The taxpayer or the dependent is enrolled for at least a half-time or at least one academic period which can be a semester, trimester, quarters, annual, summer session, or other. This academic period depends on each college and university. Alternatively, the payment period is considered as the academic period for the school that does not have any academic terms defined.
● The taxpayer or the dependent has not yet finished the four years of your post-secondary education at the beginning of the tax year. This indicates that students pursuing their post-graduate studies will not be eligible for this tax credit.
● The taxpayer or the dependent has not previously availed any AOTC or Hope credit for 4+ tax years.
● The taxpayer and the dependent are not indulged in or have been convicted of any felony drug offense by the end of the tax year.
Expenses which you can not claim the credit for
Following are some expenses that come within the sphere of educational expenses but are not eligible for this credit:
● Medical expenses
● Room and board
● Expenses paid with tax-free assistance
How to claim the credit?
For the taxpayer or the dependent to be able to avail of AOTC, filling out the IRS Form 8863 and a 1098-T Form Tuition statement that is issued from an eligible educational institution is required. The institution can be, however, situated locally or abroad. In the most usual cases, the schools hand over the Form 1098-T Tuition Statement to their students by the end of the month of January which helps students figure out their credit. The IRS form 8863 requires the Employer Identification Number (EIN) of the educational institution.
Tax credit with AOTC can not be claimed without filing a tax return even if your income range is lower than the predefined standard minimum income to file taxes.
The lifetime learning credit (LLC)
The lifetime learning experience (LLC) can be availed by the students enrolled in eligible educational institutions for their tuition fees and other relevant expenses. Students who are undergraduate, graduate, enrolled in professional degree courses, or enrolled in programs leading to certification to improve their skills can avail this credit. Unlike AOTC, LLC is not limited to the number of years. For each tax return, students can claim up to $2,000 of credit. Both AOTC and LLC can not be claimed for the same student in the same year. The credit can be claimed for tuition and relevant fees and course materials.
How to determine the eligibility?
To claim the LLC, the student or the one bearing the expenses of the student must be fulfilling the following criteria:
● The taxpayer or the dependent is enrolled or taking a course in a legitimate educational institution.
● The taxpayer or the dependent is enrolled in a program for higher studies either leading to a degree or a course to improve their skills for a job.
● At the beginning of the tax year, the taxpayer or the dependent claiming the credit should be enrolled in any course or program leading to a degree or certification for a minimum of one academic period. This period can be a semester, trimester, quarter, annual, summer session, or other, depending on the respective educational institution.
What are the income limits for LLC?
● For TY2020, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $59,000 and $69,000 ($118,000 and $138,000 if you file a joint return).
● You can’t claim the credit if your MAGI is $69,000 or more ($138,000 or more if you file a joint return).
Claiming the credit
The procedure for claiming the credit is the same for LLC as AOTC. The taxpayer or the dependent to be able to avail AOTC, filling out the IRS Form 8863 and a 1098-T Form tuition statement that is issued from an eligible educational institution are required regardless of the institution being situated locally or abroad. To be able to claim LLC double-check both the forms and make sure they are complete and accurately filled. Because if there occurs any issue in the forms, you might not be able to proceed with your claim.
What is the LLC worth?
For the first $10K, the amount that can be credited from LLC is around 20%. This means that the highest amount that one can avail is upto $2K for every tax return.
The lifetime learning experience is not refundable. This means that the amount of the credit that is released to you, won’t be refunded even if you use that credit to pay the taxes.
Important differences between LLC and AOTC
Both AOTC and LLC are quite similar however there are some fundamental key points that differentiate between the two.
● With LLC, as the name suggests, there is no defined limit of the number of years for which the same student can claim the credit. However, AOTC is limited to credit for no more than four years.
● The student does not necessarily have to be enrolled in a program leading to a degree or certificate to claim LLC. Enrollment in a career development course to improve the skill sets also satisfies the eligibility criteria.
● LLC is not refundable, whereas, AOTC can be refunded to some extent.
● AOTC covers an annual credit upto $2,500 at the most whole LLC covers $2,000 which makes AOTC a more attractive choice of the two.