Saving For College? Here Are Two Credits That Can Help

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are both very generous education tax credits many college students can use to help reduce their tax bill—or get an extra bit of cash. However, the differences between these two credits–as well as who can claim them– can cause confusion for even experienced taxpayers. To help clarify these issues, we will start by addressing eligibility requirements and discuss each individual credit.

Eligibility Requirements

While there are minor differences in eligibility for these two credits, for the most part the requirements are the same. The IRS gives us three general rules for determining eligibility for education credits:

1. The qualified education expenses must have been paid, whether by you or a third party. It is allowable to have paid these via student loans. Qualified education expenses include tuition and expenses required for enrollment but does not include room and board.
2. The student incurring these expenses must be enrolled at an eligible educational institution. An institution is qualified if it is eligible to participate in U.S. Department of Education student aid programs.
3. The student must be you, your spouse, or a dependent.

The American Opportunity Tax Credit (AOTC)

The AOTC is a relatively new credit, having been introduced as a reinvention of the Hope Credit in 2009 as a part of the American Recovery and Reinvestment Act. This act was a stimulus bill in response to the 2008 recession, which helps explain the most beneficial part of this credit: the large refundable portion.

Here are some ways the AOTC differs from the requirements above:

• This credit is only available for a student’s first 4 years of post-secondary education
• The student must be enrolled at least half time and must be pursuing a degree or other eligible credential
• The student must not have any felony drug convictions.

This credit has a maximum amount of $2,500, with 40% ($1,000) being refundable if your tax liability is reduced to zero. Some college students earn enough income to generate a large enough tax liability that allows them to get the entire $1,000 refunded.

The Lifetime Learning Credit (LLC)

The LLC was introduced in 1997 as part of the Taxpayer Relief Act to help convince individuals to pursue higher education. Here are some ways in which it differs from the eligibility requirements above and from the AOTC:

• There is no limit for how many years this credit can be claimed
• The student does not need to be pursuing a specific degree or credential
• The student only needs to be enrolled in one course
• The felony drug conviction requirement does not apply to the LLC.

The amount of the credit is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per tax return. The LLC is not refundable, therefore if your tax liability is reduced to $0, you will not receive any of the credit back as a refund. Luckily, as most undergraduate students take advantage of the AOTC, the LLC is often taken to help with graduate studies when a taxpayer would more likely have a tax liability to offset.

Conclusion

While one must be enrolled in higher education to take advantage of these credits, they are still subject to income limits—specifically, the income of a student’s parents if they are still claimed as a dependent. Therefore, it is never too early to start talking with your tax advisor to ensure you are tax-planning in a way that you can claim as large a portion of these credits as possible.

For additional considerations please reach out to Tyler Sauve, CPA, or contact our Tax Solutions Team at Mahoney to be of help to you in any way.