Higher education costs are increasing every year. Luckily, there are two education tax credits available for the 2021 tax year to help ease the burden. These are the American Opportunity Tax Credit and the Lifetime Learning Credit. Eligibility requirements and qualified expenditures are different for each, so read on to determine which one might be best for you.
The American Opportunity Credit (AOTC) allows a maximum credit of $2,500 and is partially refundable up to $1,000. The AOTC allows for 100% of the first $2,000 of a student’s qualified expenses, plus 25% of the next $2,000. So, if you spent $4,000 or more on qualified expenses the taxpayer can take the full $2,500 credit. The AOTC is first applied to any tax liability owed and if there is any remaining credit, it may be refunded up to $1,000.
To be eligible for the AOTC, the student must attend an accredited postsecondary school, which includes most trade schools. To determine if a school qualifies, you can go to https://studentaid.gov/fafsa-app/FSCsearch to verify that the school has a federal school code. The student must be enrolled, at least half-time, in a program that leads to an associate degree, bachelor’s degree, or other recognized credential during one semester beginning in 2021. The AOTC is allowed only for the first four years of post-secondary education, and a Form 1098-T, Tuition Statement, must be received from the eligible educational institution.
Qualified expenses for the AOTC include tuition, mandatory enrollment fees, and cost of books and course materials. Costs such as room and board, transportation, athletics, and student health insurance do not qualify.
The Lifetime Learning Credit (LLC) allows a maximum credit of $2,000. The LLC covers 20% of eligible costs up to $10,000. So, if you spent $5,000 in eligible costs, you would get a $1,000 credit. The LLC does not have a refundable portion as does the AOTC.
To be eligible for the LLC, the student can have qualified undergraduate expenses, graduate expenses, or expenses for courses taken to improve or maintain job skills. The major difference between the AOTC and the LLC is that for the LLC you do not need to be pursuing a degree or credential. You can only claim one credit per eligible student, so you cannot take the LLC if you are claiming the AOTC for the same student.
Qualified expenses for the LLC include tuition, mandatory enrollment fees, and cost of books and course materials. Costs such as room and board, transportation, athletics, and student health insurance do not qualify. The school does not need to be an accredited institution to qualify for the LLC.
You can claim only one of these credits per student, and the student can be yourself or a dependent child. Usually, the education tax credits are taken by the parents, but the credits can be claimed by students paying their own college expenses if they file their own tax return and are not claimed as a dependent on another return.
There is an income limitation applicable to each credit based on the taxpayer’s 2021 Modified Gross Income (MGI). Single taxpayers with MGI up to $80,000 and phasing out at $90,000 are eligible, as well as Married Filing Joint taxpayers with MGI up to $160,000 and phasing out at $180,000. However, Married Filing Separate taxpayers are not eligible for either credit.
These two education tax credits are great opportunities to reduce your tax bill and you should take advantage of them if you are able to do so. If you have questions about your eligibility to take these credits, please contact us. Our tax professionals will be happy to help you.
