There are two types of education related tax credits that taxpayers may claim for qualified tuition and related education expenses paid or incurred during the tax year: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For 2023, the credits are based on the amount of adjusted qualified education expenses paid for the student in 2023 for academic periods beginning in 2023 or beginning in the first 3 months of 2024.
As demonstrated by the IRS, for 2023, you must treat an academic period beginning in the first 3 months of 2024 as if it began in 2023 if qualified education expenses for the student were paid in 2023 for that academic period.
Example: You enroll on a full-time basis in a degree program for the 2024 spring semester, which begins in January 2024. You pay your tuition for the 2024 spring semester in December 2023. Because the tuition you paid in 2023 relates to an academic period that begins in the first 3 months of 2024, your eligibility to claim an American opportunity credit in 2023 is determined as if the 2024 spring semester began in 2023.
Taxpayers can claim these two benefits on the same return but not for the same student or the same qualified expenses. The American opportunity tax credit may be refundable, in part. The lifetime learning credit is nonrefundable. A refundable credit can give you a refund when the credit is more than the tax you owe, even if you are not required to file a tax return. A nonrefundable credit can reduce your tax, but any excess is not refunded to you.
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 AOTC is partially refundable. Up to 40 percent of the credit for the taxpayer is qualified that is more than the tax owed. Taxpayers could receive up to $1,000 in refund. 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. Taxpayers 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:
- The AOTC has not been claimed for any 4 previous years by anyone;
- Was enrolled at least half time in a qualified academic program during the tax year;
- Has not completed the first four years of post secondary education at an eligible institution before the beginning of the current tax year;
- 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.
- Was enrolled or taking courses at an eligible educational institution.
- Was taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.
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. Some educational expenses are not qualified expenses even if you pay them to enroll or attend the school. They include:
- Room and board
- Insurance
- Medical expenses (including student health fees)
- Transportation
- Similar personal, living or family 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.
For tax year 2023, the amount of your LLC is gradually reduced if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim the credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). The educational institution’s employer identification number (EIN) is not required on your Form 8863. The credit is available for:
- All years of post-secondary education and for courses to acquire or improve job skills
- Student does not need to be pursuing a degree or other recognized education credential.
- Available for one or more courses
- Tuition and fees required for enrollment or attendance
Both the American Opportunity Tax Credit and Lifetime Learning Credit amount are reduced or eliminated for taxpayers at a certain amount of modified adjusted gross income (MAGI) and other education benefits. Both credits are not available for married taxpayers filing separate returns.
IRS cautions to not claim the American opportunity credit for 2 years after there was a final determination that your claim was due to reckless or intentional disregard of the rules, or 10 years after there was a final determination that your claim was due to fraud.
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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