Understanding Education Tax Credit Eligibility Requirements
The price of an education after high school is eye-popping. On average, it now costs well over $30,000 for a year of tuition, fees, books, supplies, and living expenses at a four-year college. Trade school is also expensive - averaging around $15,000 per year. On the other hand, your earning potential can increase significantly as your level of education increases. So, higher education is generally a good overall investment. To help offset these costs, the U.S. government offers two federal education tax credits: the American Opportunity Credit and the Lifetime Learning Credit. So that you don’t miss out on these valuable tax breaks, check out the information below on the American Opportunity Credit and Lifetime Learning Credit. These credits can significantly reduce the amount you owe in taxes. If you attend a college or trade school, you may be eligible to claim an education tax credit.
American Opportunity Credit
The American Opportunity Tax Credit can cut your tax bill - and maybe trigger a tax refund - if you paid qualified higher education expenses for an eligible student. The American Opportunity Tax Credit is worth up to $2,500 per eligible student for each of the student’s first four years of college or trade school. You might be able to claim an American Opportunity Credit of up to $2,500 for 2025. You can apply this to qualified education expenses paid for each eligible student. This is a per-student limit. You can only claim it for the first four years of higher education. However, in most cases, the credit is only available for undergraduate school. That’s because you can’t claim the credit if the student has completed the first four years of post-secondary education.
Eligibility Requirements
Each credit has a different definition of an eligible student. Several requirements must be met to be eligible for the American Opportunity Credit:
- First Four Years: Not have expenses used for an American Opportunity Credit in any four earlier tax years.
- Income Limits: Not have an adjusted gross income (AGI) that’s more than the phase-out limits - $80,000 if filing as single or $160,000 if married filing jointly.
- Qualified Education Expenses: Expenses for the American Opportunity Credit include tuition and fees required for the course or program. Books, supplies, and equipment needed for a course of study.
- Restrictions: Also note that you might not be able to claim the American Opportunity Tax Credit in the future if you claim the credit when you're not eligible for it. You’ll be banned for two years if it’s determined that your ineligible claim was made with reckless or intentional disregard of the law.
Qualified Education Expenses
For the American Opportunity Credit, qualified expenses include:
- Tuition and fees required for the course or program.
- Books, supplies, and equipment needed for a course of study.
Student activity fees and course-related books, supplies, and equipment only count if they must be paid to the school for enrollment or attendance. It’s also not allowed for education expenses used to calculate other tax deductions, credits, or exemptions (again, like a tax-free distribution from a 529 plan or a business expense deduction).
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Income Phase-Out
However, the credit is phased-out if your income is above a certain amount. For married couples filing a joint return, the credit is gradually reduced if your modified adjusted gross income (MAGI) is $160,000 or more. For all other people, the phase-out begins if your MAGI is more than $80,000.
Refundability
Up to 40% of the American Opportunity Tax Credit is refundable.
There’s an exception to the refundability rules, though.
Claiming the Credit
Use IRS Form 8863 to calculate both the American Opportunity Tax Credit and Lifetime Learning Tax Credit (including the refundable portion of the American Opportunity Credit). While you can’t claim both credits in the same year for the same student, you can claim both credits in the same year for different students. The nonrefundable education credits from Form 8863 are then reported on Schedule 3 (Form 1040) with other nonrefundable credits.
Lifetime Learning Credit
The Lifetime Learning Tax Credit offers up to $2,000 in tax savings. It’s generally more accessible than the American Opportunity Credit, since it doesn't have a limit on the number of years it can be claimed. Even though the Lifetime Learning Credit is only worth up to $2,000 per year, there are also fewer restrictions when compared to the American Opportunity Tax Credit. You might be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses. You can claim this credit only once per return. For the Lifetime Learning Credit, you can claim a maximum of $10,000 in total expenses for all eligible students. The credit is equal to 20% of the expenses. So, the maximum credit allowed is $2,000 (20% of $10,000).
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Eligibility Requirements
Eligibility for the Lifetime Learning Credit isn’t based on a student’s workload. A student who takes one or more courses is eligible. You can claim the Lifetime Learning Credit for qualified education expenses paid during the tax year for yourself, your spouse, or a dependent (such as your child). There are no limits on the number of years you can claim the credit, and you can claim the credit for just one or two classes (so there’s no half-time student requirement).
Qualified Education Expenses
Qualified expenses for the Lifetime Learning Credit also include the cost of courses that aren’t part of a degree or certificate program. Tuition and fees required for enrollment or attendance in the course or program.
Income Phase-Out
As with the American Opportunity Credit, the Lifetime Learning Credit is gradually phased-out if your MAGI is more than $80,000 ($160,000 for married couples filing a joint return).
Refundability
No. The Lifetime Learning Credit is not refundable. For example, if you owe $1,600 in tax before the credit is applied, and you qualify for a $2,000 Lifetime Learning Credit, your tax bill will drop to $0. However, you won’t get a tax refund for the remaining $400.
Claiming the Credit
Use IRS Form 8863 to calculate both the American Opportunity Tax Credit and Lifetime Learning Tax Credit (including the refundable portion of the American Opportunity Credit). While you can’t claim both credits in the same year for the same student, you can claim both credits in the same year for different students. The nonrefundable education credits from Form 8863 are then reported on Schedule 3 (Form 1040) with other nonrefundable credits.
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Strategic Considerations
If you qualify for both credits for a single student, claim the American Opportunity Tax Credit instead of the Lifetime Learning Credit (you can’t claim them both for the same student in the same year).
If scholarship money or a fellowship grant is used for non-qualified expenses - such as room and board - the funds might not be tax-free. In that case, they don’t have to be subtracted from the qualified education expenses used to calculate the education tax credits.
Just because you earned an undergraduate degree doesn’t necessarily mean your college days are over. You can still go to grad school or take additional classes to get a better job.
tags: #education #tax #credit #eligibility #requirements
