Education Tax Credits: Your Guide on How to Claim Them
Whether you’re a student or the parent of a student, if you paid for college, you may be eligible for an education tax credit. Who can claim education tax credits can depend on factors such as where you go to school, your criminal history and whether you’re a dependent.
Here’s what you need to know about education tax credits, how to figure out if you qualify for one and how to claim it:
What is an education tax credit? The basics
If you file taxes in the U.S. and are paying for college, you may be able to use two common types of tax credits — the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) — as a form of compensation for what you spend on postsecondary education.
A tax credit, as opposed to a tax deduction, is a means to boost your tax refund or cut down on the amount of taxes you owe. A deduction, on the other hand, decreases your income amount that the IRS will tax you on.
During the tax season, you’ll have to choose whether to file for the AOTC or the LLC. The credit you decide to go with may depend on your financial situation. IRS Publication 970 outlines the rules for claiming these deductions and credits.
When it comes to deciding whether the student or the parents of the student receive the education tax credit, it generally comes down to who pays the bills.
- If you provide more than half of your own financial support (even if you use student loans), you can claim deductions or tax credits for your own education.
- If your parents provide more than half of your support, then they can claim you as a dependent.
The IRS has a questionnaire that can help you find out whether you’re a dependent. Additionally, IRS Publication 501 lists the conditions that must be met to qualify as a dependent.
The American Opportunity Tax Credit
The AOTC is a type of education tax credit taxpayers can receive to help cover some of the college expenses for the first four years of a student pursuing their postsecondary education.
You can receive up to $2,500 for every student. Should the AOTC take your tax bill down to zero, you claim up to 40% (up to $1,000) of the remaining credit that didn’t go toward decreasing your bill.
In order to be considered eligible for the AOTC, students must:
- Be pursuing a degree
- Be enrolled at least half time for a minimum of one academic period during that tax year
- Not have finished year four of their schooling at the start of the tax year
- Not claim the AOTC for more than four years
- Not be convicted of a felony drug charge
Lifetime Learning Credit
Unlike the AOTC, there is no time cutoff on how many years you can take the LLC. Taxpayers can claim up to $2,000 of this tax education credit per year.
To be consider eligible for the LLC, you will need to meet the following criteria:
- The person claiming the LLC will need to have spent money on “qualified education expenses for higher education,” according to the IRS.
- You or your dependent (or a third party) financially covered a student’s enrollment at a postsecondary school.
- The student must be either yourself, your spouse or a dependent that you claimed on your tax return.
To be eligible for the LLC, students must:
- Be enrolled at an eligible postsecondary school
- Be in one or several postsecondary education courses with the purpose of receiving a degree (or other type of credential) or developing job skills
- Be enrolled for at least one academic period during the tax year
Differences between the AOTC and LLC
While you can draw a lot of similarities between the AOTC and LLC, there are several differences between the two that are important to note as they may impact your eligibility.
- With the AOTC, you can only claim up to $2,500 while, with the LLC, the most you can claim is $2,000.
- In order to qualify for the AOTC, you can’t have a felony drug charge on your record; however, this is not the same case for the LLC.
- To be eligible for the AOTC, students need to be enrolled at a minimum of half time during an eligible academic period. The LLC, on the other hand, only requires that you’re enrolled in at least one course.
- You can only claim the AOTC for up to four years while the LLC has no cap on how long you can claim this education tax credit.
Tax deductions for interest payments on student loans
By claiming the student loan interest tax deduction, a filer can write off interest payments on student loans as well as other types of credit such as revolving credit lines (for example, credit cards used to pay for qualifying education expenses). You can reduce your taxable income by up to $2,500 with this deduction.
Here are the rules that determine who can claim a deduction for student loan interest.
- You can’t be a dependent or use the tax filing status “married filing separately.” If you’re a dependent, you won’t be able to write off the student loan interest you pay on your own loans (and neither can anyone else). You also can’t claim this deduction if you’re married and filing taxes separately from your spouse.
- You must be legally responsible for the student loan. Your parents can only write off payments they made on student loans they own. And you would not be able to claim a deduction for payments you made to parent PLUS loans your parent(s) took out for your education, since these are in your parent’s name only.
- You must be the person who paid the interest to claim the deduction. If your parents are the ones covering monthly payments on student loans that are only in your name, you can’t claim a deduction because you didn’t pay the interest. If your parents made payments on your cosigned student loan, however, they could claim a deduction for this debt.
- You must meet income requirements. You can’t claim the student loan interest deduction if you earn more than the limit specified amount. This amount can be adjusted every year.
Your student loan servicer must send you tax form 1098-E, which shows the interest you paid for the year, if that amount meets or exceeds $600.
Not sure if you qualify for the student loan tax deduction? The IRS has another questionnaire you can fill out to see if you’re eligible. You can also learn more about the conditions for deducting student loan interest in our student loan tax tips guide.
Frequently asked questions
Even if you do not receive a Form 1098-T from your school, you can still claim education tax credits. Be sure to track your financial records, tuition costs and education expenses in case the IRS has to verify information down the road.
Here are the qualifications you’ll need to meet if you don’t receive a Form 1098-T:
- Whether you’re the student or parent/guardian, you’ll need to meet all the other eligibility requirements.
- You can demonstrate that the student attended an eligible educational institution during the required time period.
- You can prove you paid tuition and other educational expenses at an eligible institution.
To find out whether your school is an eligible educational institution for the LLC, try one of the following methods:
- Search for your school in the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP) or the Federal Student Loan Program
- Check with your school’s financial aid office.
- If the student receives a Form 1098-T, your school is most likely an eligible educational institution, though there are some exceptions.
While you can claim education tax credits while using funds from your 529 college savings plan.
However, if you withdraw from your 529 plan and use an education tax credit toward the same educational expense, you’ll have to pay federal income tax on your 529 plan withdrawal. If you use your education tax credits to cover different expenses than the money from your 529 plan, you can skip having to pay the federal income tax.
For any remaining funds that you withdrew from your 529 plan that you don’t use toward education expenses, you may have to pay a penalty as well as state income taxes on top of federal income taxes.
If your parents paid your tuition, you may still be able to claim the American Opportunity Credit. However, you must meet the eligibility requirements for the AOTC and your parents cannot have claimed you as a dependent. If they claimed you as a dependent and paid your tuition, the tax credit could go to them.
No — if someone claims you as a dependent when they file their taxes, you can’t claim education tax credits. To be eligible for education tax credits, you’ll need to make sure your parent/guardian does not claim you as a dependent on their taxes.