Navigating College Access Tax Credits: A Comprehensive Guide
The escalating cost of higher education can be a significant burden, causing financial anxiety for students and their families. Fortunately, the government offers several education tax credits designed to alleviate these expenses. These credits can reduce the amount of tax owed or, in some cases, provide a refund, effectively putting extra money back in your pocket. However, eligibility varies depending on the specific credit.
Key Education Tax Credits
Two primary tax credits are available to help offset the costs of higher education: the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC).
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.
AOTC Details:
- Maximum Credit: Up to $2,500 per eligible student.
- Eligible Expenses: Tuition, certain required fees, and course materials needed for attendance and paid during the tax year. Unlike other education tax credits, AOTC is allowed for expenses for course-related books, supplies, and equipment that aren’t necessarily paid to the educational institution but are needed for attendance.
- Refundable Portion: The law previously allowed 40% of the credit (up to $1,000) to be refundable.
- Eligibility: Available ONLY if the student hasn’t completed the first 4 years of postsecondary education. To claim AOTC, the law requires the student to have received Form 1098-T, Tuition Statement, from an eligible educational institution, domestic or foreign.
- Income Limits: To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married taxpayers filing jointly). If your 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 your credit is reduced. For most filers, MAGI is the amount of your adjusted gross income (AGI) from your tax return.
- Claiming the Credit: To claim AOTC, complete Form 8863 and submit it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), Line 3.
Example:
Imagine a student, just beginning college this year, whose parents, Eli and Monica, pay $8,000 in eligible education expenses for their daughter’s junior year in college. Their tax liability is $1,000. They can potentially benefit significantly from the AOTC.
Important Considerations for AOTC:
- Form 1098-T: To be eligible for an education credit, the law requires the student to have received Form 1098-T, Tuition Statement, from an eligible educational institution, domestic or foreign. Generally, students get the form from their school by January. If you didn’t receive Form 1098-T, you may still be eligible to claim a credit. Make sure you’re qualified before claiming the credit and avoid common education credit errors.
- Prior Disallowance: If your AOTC claim was disallowed in a previous tax year, you may need to file Form 8862 PDF before claiming the credit in future tax years.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit, or LLC, allows a maximum credit of up to $2,000 for qualifying educational expenses paid during the tax year for an eligible student enrolled at an eligible educational institution. The LLC is calculated as 20% of up to $10,000 of qualified education expenses per return.
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LLC Details:
- Maximum Credit: Up to $2,000 per tax return.
- Eligible Expenses: Qualified tuition and related expenses for enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools).
- Unlimited Claims: Unlike the AOC, the LLC can be claimed an unlimited number of times.
- Graduate Students: Graduate students can qualify for the tax break, too!
- Claiming the Credit: To claim LLC, complete Form 8863 and submit it with your Form 1040 or 1040-SR.
Example:
Glenn paid qualified tuition of $20,000. He can claim the LLC based on the first $10,000 of those expenses, resulting in a $2,000 credit.
Eligibility Requirements for Education Tax Credits
To claim either credit, qualifying educational expenses must be paid for an “eligible student.” An eligible student can be yourself, your spouse, or your dependent for whom you claim an exemption. The meaning of an eligible student is different for each credit.
Claiming the Credits
When you take educational tax credits, you’ll need to use a few additional forms than you normally would on your tax return. To claim AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). The Trade Preferences Extension Act 2015 requires most students to have received a Form 1098-T, Tuition Statement. If you paid more than $600 in interest, a lender will automatically send you Form 1098-E.
California's College Access Tax Credit (CATC)
A new California law allows both individuals and businesses to claim a tax credit for cash contributions made to the College Access Tax Credit Fund. In 2015 and 2016, the credit amount is 55 percent or 50 percent of the amount contributed, respectively. Total allotted credits are capped at $500 million per calendar year, and applications will be processed on a first come, first served basis.
CATC Details:
- Credit Amount: 55% or 50% of the contribution amount (depending on the year).
- Contribution Recipient: The College Access Tax Credit Fund supports California Community College transfer students attending partnered Historically Black Colleges and Universities (HBCUs) and who intend to return to California following the completion of their studies through the Cal-HBCU Transfer Grant Program administered through the California Student Aid Commission (CSAC).
- Application Process: The application is available on CEFA’s Web site and may be faxed to CEFA at (916) 653-2179. Within 10 days of receiving the application, CEFA will issue a notice of allocation reservation to the taxpayer. The taxpayer in turn has 20 days after receiving notice to submit the agreed-upon contribution to the College Access Tax Credit Fund and the contribution submittal form to CEFA. CEFA will then issue certification to the taxpayer within 15 days after receiving the contribution.
- Payment Methods: Cashier’s (Official) Check, Money Order, or Check from business account (for business entities including insurer’s only).
CATC Examples:
- S Corporation: Say in 2014 an S corporation applies to make a $60,000 cash contribution to the CATC Fund, and the corporation is certified as eligible by CEFA. The S corporation would then make the contribution, earning a $12,000 credit that it could apply against its franchise tax. Although an S corporation can use a third of the credit it receives to offset its own tax liability, 100 percent of the credit will be passed through to the S corporation’s shareholders. In essence, this means the S corporation and its shareholders combined will receive 133 percent of the credit amount (nearly 80 percent of the contribution).
- Individual Taxpayer: In 2014 an individual applies to make a $50,000 cash contribution to the CATC Fund, and he or she is certified as eligible by CEFA. The taxpayer would then make the contribution, earning a 60 percent credit on it-$30,000 that could be applied against his or her California net income tax liability. The taxpayer then also takes a federal charitable contribution deduction.
Important Considerations for CATC:
- Taxpayers hoping to claim a portion of the $500 million available in CATC credits for the tax year should begin planning in advance of the July application period, since the credit is awarded on a first come, first served basis.
Navigating Education Tax Credits: Key Considerations
- One Credit Per Student: You can claim only one of the credits per qualifying student.
- Combining Credits: You can claim both the AOTC and LLC on the same return only if they are not for the same student and the same expenses.
- Form 1098-T Importance: To be eligible for an education credit, the law requires the student to have received Form 1098-T, Tuition Statement, from an eligible educational institution, domestic or foreign.
Common Questions and Answers
Q: Have there been any changes in the past few years to the tax credits for higher education expenses?
A: No, but the Protecting Americans Against Tax Hikes (PATH) Act of 2015 made AOTC permanent.
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Q: How does AOTC differ from LLC?
A: Unlike other education tax credits, AOTC is allowed for expenses for course-related books, supplies and equipment that aren’t necessarily paid to the educational institution but are needed for attendance.
Q: What is the American Opportunity Tax Credit (AOTC)?
A: It’s a tax credit of up to $2,500 of the cost of tuition, certain required fees and course materials needed for attendance and paid during the tax year.
Q: How does the AOTC reduce my tax liability?
A: You reduce the amount of tax you owe dollar for dollar by the amount of AOTC you qualify for up to the amount of tax you owe.
Q: What additional education expenses qualify for AOTC but not LLC?
A: For AOTC but not LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study. You don’t have to buy materials from the eligible educational institution. Add amounts paid for these materials on Form 8863 to your other adjusted qualified education expenses. The total of all qualified tuition and related expenses for calculating AOTC can’t exceed $4,000 and as explained in Q&A 3, the maximum allowable credit is $2,500.
Q: Is there an income limit for AOTC?
A: Yes. To claim the full credit, your modified adjusted gross income (MAGI; see Q&A 13) must be $80,000 or less ($160,000 or less for married taxpayers filing jointly). If your 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 your credit is reduced.
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Q: Where do I put the amount of my education tax credit on my tax return?
A: To claim AOTC, complete Form 8863 and submit it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), Line 3. To claim LLC, complete Form 8863 and submit it with your Form 1040 or 1040-SR.
Q: My dependent child attended college half-time for a semester and will attend full time starting next year. Can I skip taking AOTC for this year because her expenses are low and claim AOTC for next year and future years?
A: Yes. You aren’t required to claim the credit for a particular year.
Q: I completed 2 years of college right after graduating from high school years ago before there was the Hope Credit or AOTC. Can I claim AOTC now?
A: You can claim AOTC for any semester or other academic period if you take at least half of the full-time course load for the first 4 years of college.
Q: What is Form 1098-T, Tuition Statement, and do I need to receive a Form 1098-T to claim AOTC?
A: Form 1098-T is a form provided to you and the IRS by an eligible educational institution that reports, among other things, amounts paid for qualified tuition and related expenses. It may be useful in calculating the amount of the allowable education tax credits.
Q: I didn’t receive a Form 1098-T because my school isn’t required to provide it to me or my school closed and didn’t give it to me. Can I still claim an education credit for tax year ?
A: Yes. Keep records that show student enrollment and the amount of paid qualified tuition and related expenses.
Q: I received a letter from the IRS questioning my AOTC claim. What should I do?
A: If you received a Form 1098-T, review it to make sure the student’s name and Social Security number are correct. If you claimed expenses that weren’t reported on Form 1098-T, Box 1 as amounts paid, send us copies of receipts, cancelled checks or other documents as proof of payment. If you don't have a letter, see Forms 886-H-AOC and 886-H-AOC-MAX for examples. Form 886-H-AOC is also available in Spanish.
Q: What should I do if the student’s return was incorrectly prepared and filed by a professional tax preparer?
A: You’re legally responsible for what’s on your return, even if someone else prepares it. We urge you to choose a tax preparer wisely.
Additional Resources
- Tax Benefits for Education, Pub: This IRS publication provides comprehensive information on education-related tax benefits.
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