Education is one of the most valuable investments a person can make in their lifetime, but it can also be one of the most expensive.
Fortunately, the United States tax code provides two education tax credits that can help offset the cost of higher education for students and their families.
The American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is a tax credit of up to $2,500 per eligible student per year for the first four years of higher education. This tax credit can be used to offset tuition and related expenses such as books, supplies, tuition, mandatory enrollment fees, course materials and equipment.
Who qualifies for the AOTC?
To qualify for the American Opportunity Tax Credit, the student must be in the process of obtaining a degree or other recognized educational credential, attend school at least half-time, and not have completed the first four years of post-secondary education at the start of the tax year.
The credit is partially refundable, meaning that if the credit exceeds the taxpayer’s liability, the taxpayer may receive a refund for a portion of the unused credit. The refundable portion of the AOTC is 40% of the total credit, or $1,000 in this case, and the remaining $1,500 is a nonrefundable credit that provides a benefit only if the taxpayer owes federal income taxes. The nonrefundable portion of the credit is applied first to reduce the taxpayer’s tax bill, and any remaining refundable credit is paid to the taxpayer as a tax refund.
The Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) is a tax credit in the United States aimed at helping families offset the cost of higher education. It provides a tax credit of up to $2,000 per taxpayer for all years of post-secondary education and for courses to acquire or improve job skills. Unlike the American Opportunity Tax Credit (AOTC), there is no limit on the number of years the LLC can be claimed, making it a valuable option for students and families who are continuing their education or pursuing a certification or professional development.
The LLC is nonrefundable, meaning that it can only reduce the taxpayer’s federal income tax liability, and cannot result in a refund if the credit exceeds the taxpayer’s liability.
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Who qualifies for the LLC?
The Lifetime Learning Credit provides assistance with paying for higher education expenses, including undergraduate education, graduate school, and courses for job skill improvement.
To be eligible for the LLC, the taxpayer must pay qualifying education expenses for themselves, their spouse, or a dependent. Eligible individuals can claim the credit for themselves, their spouse, or their dependents. The student must be enrolled in an eligible educational institution and must be taking courses to acquire or improve job skills in order to qualify.
The credit covers up to $10,000 in qualified expenses, with a maximum credit amount of $2,000 (20% of the covered expenses). Qualified expenses include tuition and required enrollment fees, as well as books and course materials purchased directly from the school. Expenses such as optional fees and room and board do not qualify for the credit.
Both the American Opportunity Tax Credit and the Lifetime Learning Credit cannot be claimed for the same student in the same year. However, a family can claim the American Opportunity credit for one student and the Lifetime Learning credit for up to $10,000 in expenses for another student.
In conclusion, education is an expensive but valuable investment. By taking advantage of the American Opportunity Tax Credit and the Lifetime Learning Credit, students and families can reduce the cost of higher education and make the investment more affordable. If you or someone you know is pursuing higher education, be sure to check if you are eligible for these tax credits and consult a tax professional for more information
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