Higher Education Tax Credits: What Are the Requirements?

by Darren Thomas, J.D., CPA, EA, Traphagen CPAs & Wealth Advisors, LLC – December 6, 2022
Higher Education Tax Credits: What Are the Requirements?

For several decades, the year-over-year increases in the costs of college tuition and related expenses has far outpaced the general rate of inflation. Fortunately, some of the dollars that taxpayers pay for higher education expenses for themselves, their spouse or their dependents can be turned into federal income tax savings. This can be accomplished by claiming the Federal American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) for tuition and related expenses.

American Opportunity Tax Credit 

The maximum AOTC that can be claimed is $2,500 per student for the first four years of undergraduate education at an eligible educational institution. That works out to 100 percent of the first $2,000 of higher-education tuition and related expenses plus 25 percent of the next $2,000 of expenses.

Eligible educational institutions consist of accredited schools offering credit toward a bachelor’s or associate degree or other recognized post-high school credential as well as certain vocational schools.

Only the qualified tuition and related expenses of an eligible student can be used to claim the AOTC. An eligible student is one who is enrolled at least half-time in a degree or certificate program at an eligible educational institution and who has never been convicted of a federal or state felony drug offense. 

Lifetime Learning Credit 

For the LLC, the maximum that may be claimed is $2,000 per year per taxpayer, for any post-high school education at an eligible educational institution. This includes grad­uate-level courses and courses to acquire or improve job skills. The LLC is available for an unlimited number of tax years.

Unlike the AOTC, the LLC is not subject to the eligible student/felony drug offense restrictions. The LLC may be avail­able for a student taking only one course.

Claiming the Credits 

The AOTC and the LLC may not be claimed in the same tax year for the same expenses. However, each may be claimed for different expenses. For instance, a taxpayer may claim the AOTC for the qualified tuition and related expenses of one or more qualifying dependents and, in the same tax year, also claim the LLC for the qualified tuition and related expenses incurred for himself.

To claim the credits, a taxpayer must receive a Form 1098-T payee statement from the educational institution. Also, if a taxpayer’s dependent receives the Form 1098-T, the statement is treated as received by the taxpayer.

The LLC is nonrefundable so it can only reduce regular income taxes to zero. It cannot result in the receipt of a refund from the government. The credit may be claimed against the alternative minimum tax (AMT).

In contrast, the AOTC is 40-percent refundable. As such, a taxpayer can receive a refund if the amount of the credit exceeds their tax liability. For instance, say someone has at least $4,000 in qualified expenses but has no tax liability that would be offset by the AOTC. That person would qualify for the maximum credit of $2,500 and receive a $1,000 (40 percent of $2,500) refund from the government. In addition, the AOTC may be claimed against a taxpayer’s AMT.

The AOTC/LLC credits are based on the payment of “qualified tuition and related expenses.” Such expenses are for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include personal living expenses, student activity fees, athletic fees, insurance, room and board, and transportation costs. The AOTC includes books as qualified expenses, but the LLC does not.

Qualified tuition and related expenses used in computing the AOTC/LLC credits must be reduced by tax-exempt scholarships and fellowships, certain military benefits and any other tax-exempt payments of those expenses other than gifts or bequests.

The credits are phased out for higher-income taxpayers. Current law specifies that for 2021 and later years, the AOTC and the LLC are phased out for taxpayers married filing jointly with income between $160,000 and $180,000, or singles filers with income between $80,000 and $90,000. Neither credit is available for taxpayers who are married filing separately. 

Darren W. M. Thomas

Darren W. M. Thomas

Darren Thomas, J.D., CPA, EA, is the tax director at Traphagen CPAs & Wealth Advisors. He is the leader of the NJCPA Federal Taxation Interest Group.

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This article appeared in the winter 2022/23 issue of New Jersey CPA magazine. Read the full issue.