Education tax credits help offset the expenses of higher learning by reducing the tax an individual would owe the IRS and may increase their refund if they have no tax liability. Education credits can be claimed for the taxpayer as well as any qualifying dependents.
Important: Neither of these credits are available if the taxpayer's filing status is Married Filing Separately or if they are claimed as a dependent on someone else's return.
Here is a comparison of the American Opportunity Credit (AOC) and Lifetime Learning Credit (LLC). A taxpayer may claim either type credit for each student on the return but cannot claim both credits for one student.
Education Benefits Comparison
| Criteria | AOC | LLC |
| Maximum benefit | Up to $2,500 credit per eligible student | Up to $2,000 credit per return |
| Refundable or nonrefundable | Refundable (40% of the credit) |
Nonrefundable (once the tax liability is reduced to zero, no further credit is available). |
| Limit on MAGI* for married filing jointly | $180,000 | |
| Limit on MAGI* for single, head of household, or QSS | $90,000 | |
| If married, can the taxpayer file a separate return? | No | |
| Dependent status | Cannot claim benefit if someone else can claim the taxpayer as a dependent on their return. | |
| Can the taxpayer or spouse be a nonresident alien? | No, unless they are being treated as a resident alien for tax purposes. (See IRS Publication 519 for information on nonresident alien status.) | |
| Number of years of post-secondary education available | Only if the student hasn't completed 4 years of post-secondary education before the tax year | All years of post-secondary education and for courses to acquire or improve job skills |
| Number of tax years benefit available | 4 tax years per eligible student (includes any years former Hope credit claimed) | Unlimited |
| Must the credit be claimed in consecutive years? | No, the taxpayer is not required to claim a credit for a particular year. |
|
| Type of program required | Student must be pursuing a degree or other recognized education credential | Student does not need to be pursuing a degree or other recognized education credential |
| Number of courses | Student must be enrolled at least half time for at least one academic period during the year | Available for one or more courses |
| Felony drug conviction | Student must have no felony drug convictions as of the end of the year | Does not apply |
| Qualified expenses*** | Tuition, required enrollment fees, and course materials needed for course of study. | Tuition and fees required for enrollment or attendance. |
| For whom can the benefit be claimed? | • The taxpayer • The spouse • Student claimed as a dependent on their return |
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| Who must pay the qualified expenses? | • The taxpayer • The spouse • The dependent student • Third Party** |
|
| Payments for academic periods | Payments made in the tax year for academic periods beginning in the tax year or beginning in the first 3 months of the following year. | |
| Do I need to claim the benefit on a schedule or form? | Yes, Form 8863, Education Credits and Schedule 3 (Form 1040). | |
Source: IRS: Compare Education Credits
Footnotes
* Modified Adjusted Gross Income (MAGI)
MAGI is normally the taxpayer's AGI modified by adding back the following:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Exclusion of income by bona fide residents of American Samoa
- Exclusion of Income by bona fide residents of Puerto Rico
Worksheets are available in Publication 970 to assist in this calculation.
** Third Party qualified education expenses
Third party qualifying education expenses are qualifying expenses paid by a third party on behalf of the student claimed as a dependent on the return that the taxpayer would have otherwise paid. Payments by third parties include amounts paid by relatives or friends.
*** Adjustments to Qualified Education Expenses:
Qualified expenses are always adjusted by tax-free educational assistance received, and the balance is used to calculate the credit.
The following expenses do not qualify for the AOC or the LLC:
- Room and board
- Transportation
- Insurance
- Medical expenses
- Optional student fees, i.e., fees not required as a condition of enrollment or attendance
- Expenses paid with tax-free educational assistance
- Expenses used for any other tax deduction, credit, or educational benefit
Qualifying expenses aren't reduced by the following:
- Payments for services, such as wages
- Money received from loans
- Gifts
- Inheritances
- Student's personal savings
- Certain scholarships or fellowships reported as income on the student's tax return that:
- restrict the use of the funds to costs of attendance that are not qualified expenses, e.g., room and board; or
- are unrestricted and may be used for any expense.
Explanation of the Boxes on Form 1098-T
Box 1 – Payments the educational institution received that covered qualified expenses.
Box 4 – Adjustments made in the current year to amounts reported in the prior year, including amounts previously billed or additional payments received.
Box 5 – Scholarships and/or grants received on behalf of the student. These can be from the institution or from third parties, e.g., civic and religious organizations. This amount does not include any payments from family or from loan proceeds.
Box 6 – Adjustments made in the current year to prior year scholarships and grants that were previously reported.
Box 7 – Check box that indicates that the Box 1 amount includes payment for an academic period that begins during the first quarter of next year.
Box 8 – Check box that indicates that the student is at least a half-time student.
Box 9 – Check box that indicates that the student is a graduate student. (Graduate students are eligible for the LLC, not the AOC.)
Box 10 – This box is completed by an insurer that has reimbursed a student for expenses through a "tuition insurance" policy. This typically occurs when the student withdraws for medical reasons, a family emergency, etc. (This amount will reduce the credit being calculated.)
What if the student did not get a Form 1098-T?
The IRS requires that forms be sent to students by January 31st. If the student did not receive one, they should check with the institution. The preparer can still complete the forms required for claiming the credit but will need to have evidence such as receipts and proof of payment available for the IRS upon request. We suggest attaching a preparers' note to the return including a list expenses.
What if the taxpayer has qualified expenses not included on Form 1098-T?
Documented and verifiable qualified expenses not included on Form 1098-T can be added to the total, bearing in mind that the burden is on the taxpayer to demonstrate that the additional amount qualifies and is not included on the Form 1098-T.
Note: This is a guide to entering education expenses into the TaxSlayer Pro program. This is not intended as tax advice.
Additional Information:
ProWeb Navigation: Entering 1098-T and completing Form 8863, Education Credits
Desktop: Education Credits - Form 8863
IRS: Publication 970, Tax Benefits for Education
IRS: American Opportunity Tax Credit
IRS: Education Credits--AOTC and LLC