In a NutshellEducation credits can help taxpayers recoup some of the costs of higher education through their tax return. But the rules for claiming education credits are complicated — you’ll want to avoid some common mistakes.
This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.
Paying for college is a challenge for many American families.
The average undergraduate in-state tuition plus required fees at a public four-year college was $8,804 for the 2016 to 2017 school year, according to the U.S. Department of Education’s National Center for Education Statistics. Room and board bump the total expenses to $19,488. And if you’re considering a private four-year institution rather than a public school, you can expect your costs to more than double.
But there are ways for students and their families to ease the financial burden of higher education. The federal government offers two education tax credits to help recoup some of the expenses at tax time, if you’re eligible.
Taxpayers can claim either tax break for their own expenses, the expenses of a spouse or the expenses of a dependent listed on their federal tax returns. Here’s some information about the valuable tax credits and five common mistakes to avoid when claiming them.
- What education credits are available?
- Common mistakes in claiming education credits
- What to do if you make mistakes when claiming education credits
What education credits are available?
American opportunity tax credit
The American opportunity tax credit can help a student or parents recover part of the college tuition, required fees and costs of course materials paid to an eligible educational institution during the tax year. This credit on your tax return helps offset 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of those expenses, or $500. So you can claim a maximum of $2,500 per eligible student, depending on your filing status and modified adjusted gross income.
The AOTC is refundable, which means if it brings the amount of income tax you owe to $0, you can get up to 40% of the remaining amount of the credit (up to $1,000) back as a tax refund.
To be eligible to claim the AOTC, the student must be enrolled at least half time for one academic period beginning in the tax year and fulfill multiple other requirements. The credit is only available for the first four years of undergraduate education. And there are income limits, depending on the claimant’s filing status.
Lifetime learning credit
The lifetime learning credit is another tax credit available to help offset the costs of tuition and related expenses paid to an eligible institution of higher education. Claimants face income limits based on their filing statuses.
In some ways, the LLC is more expansive than the AOTC — it can be used to cover costs for undergraduate, graduate and professional degree courses. There’s no limit to the number of years taxpayers can claim the LLC, and the student doesn’t have to be enrolled at least half time.
Unlike the AOTC though, the LLC typically applies only to tuition and required fees paid directly to the educational institution — it can’t be used for course materials, such as books, supplies and equipment, unless the costs are required to be paid to the institution as part of enrollment or attendance.
The amount of the credit is 20% of the first $10,000 of qualified education expenses, or a maximum of $2,000 per tax return. Unlike the AOTC, the LLC is a nonrefundable tax credit, which means you can only use the credit to reduce your tax liability to $0, but you won’t get any money back if you owe less tax than the amount of credit available.
What counts as an eligible education institution?
For tax purposes, the IRS considers an eligible education institution to be typically any accredited public, private or nonprofit vocational school, college, university or postsecondary institution eligible to participate in a student aid program run by the Department of Education.
Common mistakes in claiming education credits
The AOTC and the LLC provide a valuable tax benefit, because they reduce the amount of tax you owe dollar-for-dollar. And in the case of the AOTC, you could even get a refund if the credit is higher than the tax you owe. But it’s important to watch out for common mistakes that can arise when claiming these education credits and learn how to avoid them or deal with the aftermath.
1. Claiming the credits when your income is too high
Both the AOTC and the LLC have income limits, so if your income is higher than the thresholds, you can’t take advantage of the credits.
To claim the full AOTC, your modified adjusted gross income, or MAGI, must be no more than $80,000 as an individual ($160,000 or less if married filing jointly). If your MAGI is more than $80,000 but less than $90,000 (more than $160,000 but less than $180,000 for a married couple filing jointly), you may receive a partial credit. If your MAGI is $90,000 or more ($180,000 or more as a married couple filing jointly), you can’t claim the credit.
For the LLC, the full credit is available only to an individual taxpayer with a MAGI of $58,000 or less ($116,000 or less if married and filing a joint return). A partial credit is available for taxpayers with MAGI of between $56,000 and $68,000 (between $116,000 and $136,000 if married filing jointly). Above those upper limits ($66,000 for single filers and $136,000 for those married filing jointly), no credit is available.What is adjusted gross income?
2. Double dipping the tax benefits
You cannot claim both the AOTC and the LLC for the same student in the same tax year. If you received tax-free scholarships or grants, you must reduce the qualified education expenses you claim by the amount of that grant or scholarship before calculating the credit.
3. A student and parent both claiming the same credit
If a parent claims an education credit for the college expenses they paid for their dependent, then the student cannot also claim the education credit on their own tax return. Parents and students should coordinate filing their tax returns to make sure they’re not claiming the credit twice for the same expenses.
4. Claiming a credit when you don’t meet attendance and other requirements
The AOTC is available only for the first four years of higher education and only if the student is enrolled at least half time in a program that leads to a degree or other recognized educational credential. If you’ve already claimed the AOTC for four years, are enrolled less than half time, are pursuing a graduate degree, or just taking courses to improve your job skills but not in a program that would lead to a degree, you may not be able to claim the AOTC. The LLC has fewer restrictions, so consider whether you’re eligible to claim that one instead.
5. Claiming a credit for nonqualified expenses
You can claim either the AOTC or the LLC to offset tuition, fees and other qualified education-related expenses required for enrollment. But only the AOTC allows you to claim expenses for books, supplies and equipment you need for your course of study that aren’t paid directly to the school.How to file an amended tax return
What to do if you make mistakes when claiming education credits
It’s a good idea to carefully review the rules applicable to each of the education credits and make sure you’re only claiming the credit for which you’re eligible. If you need help, check out the IRS’s Am I Eligible to Claim an Education Credit? interactive online tool.
If the IRS audits you and finds your AOTC claim is incorrect, and you don’t have proof to back up your claim, you’ll have to pay back the amount of the credit you received with interest. Plus you might face an accuracy or fraud penalty. You may even be banned from claiming the AOTC for two to 10 years.
So be sure to save copies of all the documents you used to determine your eligibility and amount of any education tax credit, especially when claiming the AOTC. And if you realize you’ve made a mistake when claiming an education credit, you should correct your return as soon as possible.
The IRS issued billions of dollars in in “potentially erroneous education credits” in just one year, according to a report by the Treasury Inspector General for Tax Administration. TIGTA estimated that more than 3.6 million taxpayers received more than $5.6 billion in potentially faulty credits in the 2012 tax year. The agency made several recommendations to the IRS that they believed could help detect and prevent mistaken education credit claims.
As a result, the IRS stepped up its enforcement of education credit rules. Eligible educational institutions report education expenses for students on Form 1098-T. The IRS seeks to identify questionable claims and typically reaches out to taxpayers to provide support for the credit.
So make sure you save your receipts and any other documentation needed to support your claim in case the IRS asks you to verify that you paid for any qualified expenses correctly.
Relevant sources: U.S. Department of Education’s National Center for Education Statistics Average Undergraduate Tuition and Fees and Room and Board Rates | Education Credits — AOTC and LLC | American Opportunity Tax Credit | Lifetime Learning Credit | Compare Education Credits and Tuition and Fees Deduction | Education Credits: Questions and Answers | About Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) | Education Benefits — No Double Benefits Allowed | Treasury Inspector General for Tax Administration study: Billions of Dollars in Potentially Erroneous Education Credits Continue to Be Claimed for Ineligible Students and Institutions | Definition of Adjusted Gross Income
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.