Do you have a kid going to college? Are you or your spouse taking higher education or continuing education classes? Then you need to take advantage of educational tax credits offered by the federal government.

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are available to qualifying students attending eligible institutions.  Here's what you need to know.

The American Opportunity Tax Credit

The AOTC (no, not the US Representative for New York) is a credit for qualified educational expenses paid for by an eligible student in the first four years of higher education. 

Each eligible student receives a maximum annual credit of $2,500 and pays for 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses paid for the student.

If the credit brings your taxes to zero, the IRS refunds 40% of any remaining credit up to $1,000.

Eligibility

An eligible student must meet the following qualifications:

• Must pursue an associate or bachelor’s degree or other recognized education credential such as a certificate
• Must be enrolled at least half-time for at least one academic period* beginning in the tax year
• Must have completed less than the first four years of higher education at the beginning of the tax year
• Must have no felony drug convictions at the end of the tax year
• Must not be considered a non-resident alien for tax purposes
• Must not have claimed the AOTC or former Hope credit for more than four tax years
• Everyone (you, your spouse, and your qualifying student) must have valid taxpayer ID numbers or have applied for one on or before the due date of your tax return, including extensions

The student can be a non-resident alien who is married and files a joint return with a US citizen or who is a dual-status alien who chooses to be treated like a US resident for the entire year. 

*An academic period is a semester, trimester, quarter, or any other study period like summer school sessions. Schools determine the academic periods, but if they use clock or credit hours without a defined academic term, the payment period can be treated as an academic period.

Covered Expenses

The AOTC covers the following expenses:

• Tuition
• Mandatory enrollment fees
• The cost of books and course material
• The amounts paid with gifts from private individuals, like if Uncle Harry gives you money for college

What the AOTC will not cover:

• Room and board
• Optional fees for student health insurance, athletics, or other activities
• Transportation 
• Elective courses with no degree credit involving sports, games, or hobbies
• Tuition and fees paid through employer reimbursement plans, scholarships, fellowships
• Courses deducted as business expenses
• Courses paid through a distribution from an Educational IRS or excluded interest from a Series EE US savings bond

Eligible institutions include almost all public, nonprofit, or for-profit post-secondary schools, including many trade schools. Go to FAFSA.gov to verify that your school has a Federal School Code indicating eligibility.

The Lifetime Learning Credit

Suppose you already have a bachelor's degree or have completed your first four years of college. In that case, you may be eligible for the Lifetime Learning Credit (LLC, not to be confused with a limited liability company). 

The LLC covers up to $2,000 of undergraduate or graduate school costs and 20% of qualified educational expenses up to $1,000. The maximum credit is $2,000 before it begins to phase out. 

Students who are not eligible for the AOTC due to a limited course load or already have four years of college credit can qualify for the LLC. You or your spouse can use it to help with graduate school classes or courses to improve or maintain your job skills. 

The maximum covered expense is $10,000, no matter how many students claim the LLC. Qualified expenses include the following:

• Tuition 
• Mandatory enrollment fees at eligible institutions
• Books and course material, but only if you are required to purchase them directly from the school

The LLC does not cover optional fees or room and board. Also, the LLC is unavailable if your filing status is married, filing separately.

Student Eligibility Limits

To claim the full AOTC or LLC credit, your modified adjusted gross income (MAGI) but be $80,000 or less if your filing status is single or $160,000 or less if you file jointly. You cannot claim either credit if your MAGI is over $90,000 for a single filer or $180,000 for married, filing jointly.

You can receive partial credit for earning $80,000 ($160,000) up to $90,000 ($180,000). 

How to Claim the AOTC or LLC

The taxpayer or their dependent must receive Form 1098-T, Tuition Statement from the eligible educational institution, foreign or domestic. Usually, you receive it by January 31 of each year. 

The 1098-T helps determine your credit. The amount in Box 1 shows the tuition amounts received during the year but may not be the amount you can claim.

Complete Form 8863 and attach it to your tax return, but make sure you qualify before claiming either credit. Also, keep all your supporting documentation because if the IRS audits you and you…

• Don’t have documentation
• Made an error
• Are inaccurate
• Committed fraud

…you must pay back the credit plus interest and/or penalties. Also, the IRS could ban you from claiming the credit for two to ten years. Boo. 

Common Filing Errors

The IRS considers the following errors that disallow you the credit:

• The student is listed as a dependent or spouse on another return
• The student who doesn’t have Form 1098-T showing attendance at an eligible educational institution
• You claim qualified educational expenses that were never paid
• You claim credit for a student who is not attending college or other higher education classes

Also, you cannot claim the AOTC and the LLC for the same student in the same year. However, you can potentially claim the AOTC for more than one student or the LLC for up to $10,000 in qualified expenses for other students in your family.

Any Questions, Class?

If you want to know more about the American Opportunity Tax Credit or the Lifetime Learning Credit, contact Top Tax Defenders. We can help you study for your tax filings and advise you on whether you, your spouse, or your student qualifies. 

So, go ahead and get ready for class at your chosen institution and let us handle the rest.