Education Credits and Other Tax Benefits for Students

Let’s face it: higher education is expensive—but it can open up a world of opportunities for learners. Having a more educated population also benefits communities, whether students become doctors and lawyers or plumbers and electricians. As we’ve often discussed in this space, when the government wants to motivate people to do something, it often does so by offering a tax incentive—like education credits.

What are Education Credits?

Education credits, like other tax credits, directly reduce the amount of income tax a taxpayer owes dollar for dollar (unlike tax deductions, which reduce the amount of income on which income tax is calculated). Education tax credits can make it more affordable to pursue higher education—and in some cases, can make it possible for someone who could not otherwise afford to go to college.

The two primary education tax credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

The American Opportunity Tax Credit

The American Opportunity Tax Credit has three basic eligibility criteria:

• The taxpayer, their spouse, or a dependent listed on their tax return, is an eligible student.
• The student is enrolled in one or more courses at an eligible educational institution.
• Qualified expenses are paid for by the taxpayer or their spouse, the student, or a third party.

The value of the credit is up to $2,500, which includes 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. “Qualified expenses” include tuition, required enrollment fees, and course materials that are needed for the course of study. The student must be enrolled at least half time for at least one academic period to claim the AOTC, and must be pursuing a degree or other recognized education credential.

The credit is also available for a maximum of four years of post-secondary education per student; that includes any years the student claimed the former Hope Credit, which has been replaced by the AOTC.

The AOTC is partially refundable, which means that a taxpayer who can claim the maximum amount of the credit, but who owes no taxes, can still get 40% of the credit amount—$1,000—as a refund.

There are income limits for claiming the AOTC; for tax year 2023, married taxpayers filing jointly could have no more than $180,00 in modified adjusted gross income (MAGI). The limit for single taxpayers or heads of household was $90,000. The AOTC is unavailable to students who have had a felony drug conviction.

The Lifetime Learning Credit

The Lifetime Learning Credit is available for students enrolled in an eligible educational institution with qualified tuition and related expenses. The three basic criteria for eligibility are the same as those for the AOTC.

The maximum benefit is up to $2,000 in tax credit per tax return. Unlike the AOTC, the LLC is not a refundable tax credit. In other words, the LLC can only reduce a taxpayer’s taxes to zero; it cannot generate a refund. “Qualified expenses” under the LLC include only tuition and fees that are required for enrollment or attendance. Neither the AOTC nor the LLC can be claimed for expenses such as room and board.

However, the LLC is available for all years of post-secondary education without limitation, as well as for courses to gain or improve job skills—there is no requirement that the student be pursuing a degree or credential, as there is with the AOTC. Also unlike the AOTC, there is no limitation on the number of years for which the LLC can be claimed; but it cannot be claimed in the same year as the AOTC for the same student and same qualified expenses. (A taxpayer could, for instance, claim the LLC for their own expenses and the AOTC for their child’s college expenses on the same tax return.)

The income limits for claiming the LLC are the same as those for claiming the AOTC: $180,000 for married taxpayers filing jointly, and $90,000 for single taxpayers or heads of household. However, unlike the AOTC, there are no restrictions on claiming the LLC for students with a felony drug conviction.

Other Tax Benefits for Students

These education tax credits for students should definitely not be overlooked; if you are eligible for one of them and fail to claim it, you could be leaving hundreds or even thousands of dollars on the table each time you file your income taxes. But the AOTC and the LLC are not the only way for students or their families to save on taxes.

For instance, if you pay student loan interest, you can deduct up to $2,500 per year in interest paid on your income tax, subject to income phase-outs; if you earn more than a certain amount, the amount of interest you can claim gradually reduces to zero. You can also save on taxes by contributing to a 529 plan. Those contributions are not tax-deductible, but earnings on them grow tax-deferred. So long as you use withdrawals for qualified expenses, those withdrawals are tax-free. Your tax professional may be able to help you identify other tax savings for education.

The Bottom Line

Higher education can offer tax benefits for students, but it can be hard to know how to maximize those advantages. To get the most out of your education expenses, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.