What Are Education Tax Credits?

(June 2024)

What Are Education Tax Credits?

In This Article

Higher education expenses like tuition, fees, and textbooks can be offset using education tax credits. Paying higher education expenses like college tuition, fees, books, and supplies can be made more affordable by claiming education tax credits on your return.

Thankfully, tax credits exist to help offset some of that financial burden. The two main education credits available are:

  • American Opportunity Tax Credit: Provides up to $2,500 per eligible student for the first 4 years of college.
  • Lifetime Learning Credit: Offers up to $2,000 per tax return for any level of qualified education after high school.

Taking advantage of these credits can yield significant tax savings each year you or family members have qualifying education expenses. This guide will walk through the steps to determine if you’re eligible, calculate the credits, properly claim them on your taxes, and get the maximum benefit. With some planning and coordination, education credits can reduce your tax bill by hundreds or even thousands of dollars annually.

  1. Determine Eligibility
  2. Identify Qualifying Expenses
  3. Tally Out-Of-Pocket Expenses
  4. Subtract Any Tax-Free Financial Aid
  5. Calculate Maximum Credit Amount
  6. Complete Form 8863
  7. Claim Credit Amount On Schedule 3 Of Form 1040 Tax Return
  8. Retain Receipts And Documents

Recap

1. Determine Eligibility

To enjoy education tax credits, know if you’re eligible based on income, student status, and relationship to student paying expenses.

There are several eligibility requirements to qualify for education tax credits:

  • Adjust your gross income to be below the income thresholds for your filing status. For 2022, the limit is $80,000 if single or $160,000 if married filing jointly. The credits phase out at higher incomes.
  • Pay the qualified education expenses for yourself, spouse, or a dependent you claim on your tax return. Generally, you must be legally obligated to pay the expenses.
  • Pursue an undergraduate or graduate degree or enrolled at least half-time in a vocational program leading to a degree, certificate or other recognized credential. For the Lifetime Learning Credit only, you can also be taking courses to acquire or improve job skills.
  • Enroll in an eligible college, university, or vocational school that qualifies for federal financial aid programs.
  • Avoid having a felony conviction for possessing or distributing controlled substances.
  • Have a valid Social Security number or other taxpayer identification number.
  • Ensure your tax filing status cannot be married filing separately.
  • Avoid being claimed as a dependent on someone else’s tax return.
  • Prevent taking the American Opportunity Credit for more than 4 tax years per eligible student.

2. Identify Qualifying Expenses

To understand what education tax credits are, identify the qualified tuition, fees, books, supplies, and equipment expenses.

The key to maximizing education credits is determining which school expenses count as qualifying expenses. For the credit calculation:

  • Make sure to use amounts actually paid in the tax year after deducting any scholarships, grants, or other tax-free assistance. Tuition and mandatory enrollment fees required for attendance or enrollment.
  • Include fees for books, supplies, and equipment required for the course that must be paid to the school. This includes books, laptops, lab equipment if required by the program.
  • Incorporate expenses related to academic tutoring, counseling, and career counseling services.
  • Cover fees for sports, games, hobbies, and non-credit courses are only eligible if required as part of the degree program.

Expenses that do NOT qualify include:

  • Room and board, insurance, medical, transportation, and personal living expenses
  • Course-related books, supplies, equipment not paid to the school

3. Tally Out-Of-Pocket Expenses

To have education tax credits, tally out-of-pockets expenses paid for each eligible student.

Add up the qualified expenses that were paid in cash or credit card by you or the student. Do not include amounts paid from loans or tax-free assistance which will be subtracted later.

If claiming expenses for multiple students, tally each student’s qualified education expenses separately.

For the American Opportunity Credit, tally expenses paid during the entire tax year. For Lifetime Learning, list expenses paid during any academic period starting in 2022.

The total out-of-pocket payments will form the basis for calculating the credit amounts. Keep detailed receipts and fee statements to document expenses paid.

4. Subtract Any Tax-Free Financial Aid

To get an education tax credit, remove any tax-free financial aid received. Add up all tax-free assistance received specifically to pay the qualified education expenses for each student. This includes:

  • Scholarships, grants, gifts
  • Employer-provided educational assistance
  • Withdrawals from 529 plans or education IRAs
  • Veterans or military education benefits
  • Tax-free stipends or grants for teaching and research
  • Any other tax-exempt educational assistance except gifts or inheritances

Reduce the total expenses paid by the tax-free assistance received for each student you pay for. Only the net amount can be used to calculate the credits.

5. Calculate Maximum Credit Amount

To benefit from education tax credits, calculate maximum credit amount using expenses. Depending on the total qualified out-of-pocket expenses remaining after subtracting tax-free assistance, calculate the maximum credit amounts:

For American Opportunity Credit:

  • 100% of first $2,000 in expenses = $2,000 credit
  • Plus 25% of next $2,000 in expenses = up to $500 more for max $2,500 credit

For Lifetime Learning Credit:

  • 20% of first $10,000 in expenses = maximum $2,000 credit

If you paid expenses for more than one student, calculate each student’s credit separately.

6. Complete Form 8863

Form 8863

To gain an education tax credit, fill form 8863 to report student details and credit calculation.

To claim education credits, you must complete IRS Form 8863 Education Credits. Enter each student’s name, SSN, expenses paid, and maximum credit calculation.

The form summarizes the information and credit amount to claim for each eligible student. Form 8863 must be filed with your Form 1040 tax return.

7. Claim Credit Amount On Schedule 3 Of Form 1040 Tax Return

Schedule 3 Of Form 1040

To receive the tax benefits, you must claim the education credit amounts from Form 8863 on your Form 1040:

  • Enter American Opportunity Credit from Form 8863, line 8 on Schedule 3, line 3
  • Enter Lifetime Learning Credit from Form 8863, line 18 on Schedule 3, line 4

This will reduce your tax liability and increase your refund when you complete your Form 1040 income tax return.

8. Retain Receipts And Documents

To keep records regarding your education tax credits, store receipts and documents to validate eligibility and expenses. Keep detailed records that support your education credits claimed including:

  • Itemized tuition fee statements from the educational institution
  • Receipts and cancelled checks showing out-of-pocket amounts paid for qualifying expenses
  • Documentation of any scholarships, grants, stipends, or other tax-free assistance received

Having proper documentation proves eligibility if audited. Records should be kept for at least 3 years after filing.

Recap

Education tax credits are available to alleviate the financial burden of higher education expenses, covering a portion of tuition, fees, and books. Understanding eligibility criteria, identifying qualifying expenses, and meticulously documenting out-of-pocket payments are key steps in claiming these credits.

Completion of Form 8863 and inclusion of credit amounts on Schedule 3 of Form 1040 is essential to obtain these tax benefits. Proper record-keeping substantiates claims and ensures compliance, supporting eligibility for education tax credits.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.

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