Let’s face it: higher education is expensive, whether it’s community college, a trade school, a four-year university or an advanced degree. That’s where higher education tax credits come in.
Credits reduce the amount of tax owed by qualified taxpayers. Some credits are refundable, that is, if a refundable credit reduces tax owed to less than zero, the taxpayer could get a refund.
And higher education credits can apply to more than just the taxpayer who files. Anyone listed on the return as a dependent—be it a spouse or a child or other dependent—could be eligible if they qualify.
At present there are two credits for higher education expenses and they each cover a different sort of educational scenario.
This credit aims for the student starting out on their higher-education journey. Some of the main features of the American opportunity tax credit include:
- The credit is for those students pursuing a degree or some other recognized education credential.
- The credit only covers the first four years of education at an eligible college or vocational school.
- Taxpayers can receive up to $2,500 per qualifying student.
- The credit is partially refundable, with eligible students potentially getting up to $1,000 back.
In contrast to the American opportunity tax credit, the lifetime learning credit helps those who have had to “go slow” with their education, stringing their classes out over an extended period—or those students who have to take courses in order to remain employed. Major features of the lifetime learning credit include:
- No matter how many dependents on a single tax return qualify for this credit, the maximum benefit is capped at $2,000 per tax return.
- The credit is available for all years of postsecondary education and for classes to acquire or improve job skills. This includes courses to maintain certification in order to remain employed.
- The credit covers courses no matter when they were taken; it is available for an unlimited number of tax years.
When it comes to claiming either of these credits, the starting place is the institution where the classes are taken. The school has to be an eligible educational education and it must send the student a Form 1098-T.
The IRS cautions, however, that there are some exceptions for some students.
To claim either credit, taxpayers should file Form 8863, Education Credits, in their income tax return.
For more information on these two education credits, see Compare Education Credits, and Publication 970, Tax Benefits for Education on IRS.gov. Use the Interactive Tax Assistant to see if a taxpayer is eligible for these credits.