Education Tax Credits: AOTC vs. Lifetime Learning

1Why this matters

College and training costs can be eased by thousands of dollars through these credits, but families often claim the wrong one, miss the refundable part, or lose the credit by counting expenses already paid with a scholarship. Because only one credit can be used per student each year, and the AOTC can be used only four times, choosing well matters. This guide compares the two credits and explains who can claim them, what counts and how to claim.

2The American Opportunity Tax Credit

The AOTC is worth up to $2,500 per eligible student: 100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000. Up to 40 percent of the credit, $1,000, is refundable. The student must:

• be pursuing a degree or other recognized credential;
• be enrolled at least half time for at least one academic period starting in the year;
• not have finished the first four years of higher education at the start of the year;
• not have had the AOTC claimed for them for more than four tax years; and
• not have a felony drug conviction at the end of the year.

3The Lifetime Learning Credit

The LLC is worth up to $2,000 per tax return, 20 percent of the first $10,000 of qualified expenses for all students on the return. It is nonrefundable, so it can lower your tax to zero but not produce a refund. Because the $2,000 limit applies to the whole return, a family with several students in LLC-eligible study shares one cap.

It has no limit on the number of years and no requirement to be in a degree program or enrolled half time. It covers graduate school, a fifth year of college, and courses taken to get or improve job skills, such as a certificate class at a community college.

4What are the income limits?

Both credits phase out over the same ranges of modified adjusted gross income: $80,000 to $90,000 for single filers, heads of household and qualifying surviving spouses, and $160,000 to $180,000 for married couples filing jointly. Within the range the credit is reduced in proportion, so a single filer with $85,000 gets half the credit. Above the top you cannot claim either.

You cannot claim either credit if you are married filing separately, or if someone else can claim you as a dependent. Students under 24 who are subject to the tax rules for children's investment income generally cannot receive the refundable part of the AOTC.

5Which expenses count?

Qualified expenses are tuition and fees required for enrollment, paid to an eligible school. For the AOTC, books, supplies and equipment needed for the course count too, even if not bought from the school. Student activity fees count only when paying them is a condition of enrollment. Room and board, transportation, insurance and medical fees do not count for either credit. An eligible school is generally any accredited college, university or vocational school that takes part in federal student aid.

Subtract tax-free help first. Expenses paid with a Pell Grant, scholarship, employer education assistance or a tax-free 529 plan withdrawal cannot also be used for a credit. In some cases a student can choose to treat part of a scholarship as taxable income used for living costs, freeing tuition to qualify for the AOTC, which can increase the family's total benefit; tax software and IRS Publication 970 explain how.

6Who claims the credit?

If the student is your dependent, you claim the credit, even if the student paid the expenses. If no one claims the student as a dependent, the student can claim it. For parents who are divorced or separated, the parent who claims the student as a dependent is the one who can claim the credit. You, and for the AOTC the student, need a Social Security number or taxpayer identification number issued by the return's due date, and the AOTC also requires the school's employer identification number on Form 8863.

7How to claim, and how to choose

Complete Form 8863 and attach it to Form 1040. Your school generally sends Form 1098-T by January 31 showing payments and scholarships, but the amounts you actually paid, not the form, decide the credit, so keep receipts and statements.

You can claim only one credit per student per year, but different students on one return can use different credits. For a student in the first four years of a degree, the AOTC is almost always larger and partly refundable. The LLC suits graduate study, part-time study and job training. If you missed a credit, you can generally claim it within three years by amending that year's return; see our guide to unclaimed tax refunds.

8Other help with education costs

• Federal student aid: Pell Grants, work-study and federal student loans, applied for through the FAFSA, are separate from tax credits and often worth more.
• Student loan interest deduction: up to $2,500 a year of interest on qualified student loans, reduced at higher incomes.
• Employer educational assistance: up to $5,250 a year from an employer for tuition or student loan payments can be tax-free.
• 529 plans: tax-free withdrawals for qualified education costs, which must not overlap with expenses used for a credit.

9Common mistakes

• Claiming a credit for expenses already paid with a scholarship or grant.
• Claiming the AOTC for a fifth year, when only four years are allowed.
• Both the parent and the student claiming a credit for the same student.
• Counting room and board as qualified expenses.
• Filing separately as a married couple, which rules out both credits.

11What this does not tell you

The credits depend on your income, the student's enrollment and the expenses you paid after tax-free aid. This guide gives the rules, not a personal figure, and is not tax advice.

Student loan interest, 529 plans and other education tax benefits work differently and are only touched on here.