There are two (2) types of education related tax credit that taxpayers may claim for qualified tuition and related expenses paid or incurred during the tax year: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

The Protecting Americans Against Tax Hikes (PATH) Act of 2015 made the AOTC permanent. Taxpayers reduce the amount of tax they owe dollar for dollar by the amount of the AOTC for which they qualify up to the amount of tax they owe. 

The credits are elective. Up to 40 percent of the AOTC may be refunded if it exceeds the taxpayer’s regular tax and alternative minimum tax (AMT) liability. No portion of the credit is refundable in the case that a student is subject to the kiddie tax. The maximum AOTC credit amount is $2,500 per eligible student per year. The total of all qualified tuition and related expenses for calculating the AOTC cannot exceed $4,000.

For taxpayers to claim the full credit, their modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married taxpayers filing jointly). If taxpayers’ MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married taxpayers filing jointly), the amount of the credit is reduced. When taxpayers’ MAGI is over $90,000 ($180,000 for married taxpayers filing joint), they cannot claim the credit.

Married taxpayers filing separately and taxpayers who are dependent of another taxpayer cannot claim the credit. The taxpayer must receive a copy of Form 1098-T from the eligible educational institution to claim the credit, unless an exception applies.

The AOTC is available when a student meets the following requirements:

  1. The AOTC has not been claimed for any 4 previous years by anyone;
  2. Is enrolled at least half time in a qualified academic program during the tax year;
  3. Has not completed the first four years of post secondary education at an eligible institution before the beginning of the current tax year;
  4. Has not been convicted of any federal or state felony class offense for possession or distribution of a controlled substance as of the end of the year.

Taxpayers can still claim the AOTC if they did not receive a Form 1098-T because the school is not required to provide a Form 1098-T if:

  • The student and/or the person able to claim the student as a dependent meets all other eligibility requirements to claim the credit,
  • The student can show he or she was enrolled at an eligible educational institution, and
  • The taxpayer can substantiate the payment of qualified tuition and related expenses.

Taxpayer must ensure they keep records that show the student was enrolled and the amount of paid qualified tuition and related expenses.

The lifetime learning credit (LLC) is equal to 20 percent of qualified tuition and related expenses paid by taxpayers during the tax year on the first $10,000 of tuition or a maximum of $2,000 per return. The LLC is not refundable. The credit is calculated on a per taxpayer basis and not per student basis. To qualify, the taxpayer’s annual modified adjusted income in 2021 is $69,000 or less ($138,000 if married filing jointly). The credit phases out for taxpayers with income between $59,000 and $69,000 ($118,000 and $138,000).

The student must:

  • Be enrolled or taking courses at an eligible educational institution.
  • Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.
  • Be enrolled for at least one academic period beginning in the tax year.

Remember that both American Opportunity Tax Credit and Lifetime Learning Credits amount are reduced or phased out for taxpayers at a certain amount of modified adjusted gross income (MAGI) and other education benefits.

Taxpayers who fraudulently or recklessly claim the AOTC in a tax year is temporarily prohibited from claiming the credit in following years. Many taxpayers filing single have been audited because their tax preparers claimed they attended qualified institutions without evidence.

A paid tax preparer is subject to a penalty if he or she fails to comply with certain due diligence requirements for any return in which the AOTC and LLC are claimed.

Further reading:

Internal Revenue Code (sec. 25A, 135(d)(2), 529(c)(3)(B) and 530(d)(2)(C); Reg. 1.25A-1,2,5).

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