Budgeting • Banking •
May 2, 2022
Everything You Need to Know about College Tax Credits
Want to reduce your tax bill? Check out this guide from Mos explaining how you can claim college tax credits.
Let’s be honest: only accountants get excited about tax season. For most of us, it’s just a major chore that leaves our pockets considerably lighter—especially if you’re a college student or recent grad who’s already working hard to pay the bills.
The good news is that the IRS does acknowledge that college tuition and student loans cost a whole lot of money. That’s why the tax authority offers a couple of key college tax credit schemes and deductions that can drastically reduce your annual tax bill. You’ve just got to take the time to do your homework, get organized, and understand eligibility requirements.
That’s where Mos comes in.
This guide outlines the main types of IRS college tax credits, explains how the American Opportunity Tax Credit and Lifetime Learning Credit work, and how to use the Student Loan Interest Deduction.
Can you claim college tax credits?
If you have paid any amount of money toward your college education within the last year, chances are you’ll be allowed to claim one or more college tax credits or a tax deduction.
What is a tax credit?
Simply put, a tax credit is an IRS incentive that lets you subtract money from the amount of taxes you owe the government. Likewise, a tax deduction is another IRS tax incentive that lets you reduce the amount of income the government can tax.
Deductions are normally expenses that the government recognizes affect your ability to pay taxes—which is why the IRS is willing to cut you a break for certain deductibles.
Now that we’ve covered tax jargon, let’s get back to the question at hand: when are you allowed to claim college tax credits?
If you’ve paid money to your school in the current tax year, or you’ve paid money to a lender like the US Department of Education for giving you a student loan, you can normally qualify. Likewise, parents are normally able to take advantage of college tax credits for their children, too—but only as long as they don’t choose to file independently or if they’re a married couple.
You (or your parents) have a couple of different options worth exploring if you’d like to claim college tax credits or college tax deductions. That being said, there are 3 key schemes you should definitely be aware of.
Those schemes are:
The American Opportunity Tax Credit
Lifetime Learning Credit
Student Loan Interest Deduction
Before you file your taxes, it's critical you understand whether you're eligible to claim against one of these schemes. After all, why would you want to give the IRS more money than you already have to?
To help you cover all your bases, we’ll walk you through each scheme and how it works.
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit (AOTC) is an IRS tax credit designed to support students or parents who’ve had to pay for qualified education expenses for up to 4 years at a college or university.
The maximum annual tax credit you can apply for through this scheme is $2,500 per eligible student.
If you’re in a position in which the AOTC slashes the amount of tax you owe to nothing, you can even get up to 40% of any remaining amount of the credit (or $1,000, whichever is less) refunded to you.
When applying for the AOTC, you’re allowed to apply for a credit of 100% of the first $2,000 worth of qualified education expenses you paid for. This can be applied separately for each eligible student—which is useful for parents with multiple children in college. From there, you can apply for 25% of the next $2,000 worth of qualified education expenses you paid for that student.
Again, it’s important to note that students or their parents can apply for this credit. Who gets to use the credit just depends on who is paying for the education.
Who’s eligible to claim the American Opportunity Tax Credit?
To be eligible for the AOTC, the student in question will need to fulfill a number of eligibility requirements.
First and foremost, the student has to be pursuing a degree or another recognized education credential to qualify for the AOTC. This applies whether the student or the parent is claiming the credit.
In addition, the student needs to be enrolled at least part-time for at least one semester or academic period during the tax year you’re filing for. That means you could be a part-time student who began your degree in the second half of the tax year and still qualify for the tax credit.
An important eligibility requirement to bear in mind is that you (or the student you’re claiming for) must be in school currently. If the student in question has finished the first 4 years of a higher education degree at the beginning of the current tax year, you can’t claim the AOTC.
Similarly, you won’t be eligible to claim the AOTC if you’ve already claimed the credit (or former Hope credit) for 4 years in a row.
Finally, eligible students can’t have any felony drug convictions at the end of the relevant tax year.
How to claim the American Opportunity Tax Credit
After you’ve decided whether you’re eligible, the next step is to claim the credit.
If you want to be able to claim the AOTC, you’ll need to have received and be able to access Form 1098-T Tuition Statement.
You should receive this form annually from your school. Generally speaking, most college students receive Form 1098-T Tuition Statement from their college by January 31 every year. This form is simply a detailed statement of the amount of money you paid (or was paid on your behalf) towards covering the cost of your tuition.
If you want to be able to claim the full AOTC, your modified adjusted gross income (MAGI) will need to be $80,000 or less. If you’re a parent and you and your spouse file jointly, that income cap is doubled to $160,000.
If your individual MAGI is more than $80,000 but less than $90,000, you can still receive a reduced amount of the credit. But if your MAGI is more than $90,000 (or $180,000 filing jointly with a spouse), you won’t be able to claim the credit.
To claim the AOTC, all you’ve got to do is complete IRS Form 8863 and attach the completed form to your tax return.
What is the Lifetime Learning Credit?
The Lifetime Learning Credit (LLC) is another IRS tax credit designed to help students (or their parents) pay for qualified tuition and related expenses at an eligible college, university, or higher education institution.
The LLC can be used to help you pay for undergraduate courses, grad school courses, or professional degree courses. This includes any courses you can demonstrate helped you to improve your job skills, like a continuing professional development (CPD) course.
Unlike the AOTC, there’s actually no limit to the number of years that you’re allowed to claim the Lifetime Learning Credit—and it’s worth up to $2,000 per tax return.
Who’s eligible to claim the Lifetime Learning Credit?
You’re eligible to claim the LLC if you meet all of the following conditions.
First, you or a dependent must have paid (or be paying) qualified education expenses for a higher education course. Second, the qualified education expenses you or your dependent are paying have to be as a result of enrollment at an eligible education institution.
Finally, the eligible student you’re claiming for has got to be either yourself, your spouse, or a dependent that you’ve listed on your IRS tax return.
If you tick all 3 boxes, you should be eligible to claim the LLC.
How to claim the Lifetime Learning Credit
If you want to claim the LLC, you’ll need to do so in the same way you’d claim the AOTC.
First, you’ll need to have gotten your Form 1098-T Tuition Statement from an eligible college or university. Again, it’s worth noting that most students can expect to receive their Form 1098-T by or before January 31 every school year.
Also, like the AOTC, you also need to be aware that the LLC does have income limits which may affect your ability to claim the credit.
If your MAGI is between $59,000 and $69,000, the amount of credit you can claim will gradually reduce until you hit the higher end of that threshold. Don’t forget: if you file your taxes jointly with your spouse, the cap on your MAGI is doubled to $138,000.
If your MAGI is above either the individual tax return or joint return cap, you won’t be able to claim the Lifetime Learning Credit.
Assuming you’re eligible to claim the LLC, the process is pretty straightforward. You just need to fill out and submit IRS Form 8863 alongside your Form 1040 or Form 1040-SR.
What is the Student Loan Interest Deduction?
In addition to college tax credits, you can also lower your tax burden thanks to the Student Loan Interest Deduction.
The Student Loan Interest Deduction lets you deduct as much as $2,500 (or the amount of interest you actually paid during the year) from the amount of your taxable income listed on your annual tax return.
Just like a college tax credit, the deduction amount you can use as part of this IRS deduction scheme is gradually reduced if and when your MAGI hits the annual limit relevant to your filing status.
Fortunately for those of us who aren’t accountants, claiming this deduction is pretty simple. You don't need to itemize your deductions as part of the scheme. Instead, you can just claim the deduction as an adjustment to your income.
Who can claim the Student Loan Interest Deduction?
The Student Loan Interest deduction is another great way to lower your tax bill while paying off student loans—but you should bear in mind that there are some eligibility requirements here in terms of who gets to claim the deduction.
To qualify for the Student Loan Interest Deduction, all of the following need to apply:
You must have paid interest on a student loan during the current tax year.
You must be legally obligated to pay interest on a qualified student loan.
If you’re married, you can’t file your taxes separately from your spouse.
Your MAGI has to be less than a specified cap for your filing status.
You can’t be claimed as a dependent on somebody else’s tax return.
If you fulfill all of these requirements, you’re permitted to claim the deduction.
Can parents deduct college tuition?
The simple answer is: yes. Parents can claim a college tax credit or deduction—but only if the student is also noted as a dependent on the parent’s tax return.
That being said, it’s important to note that some parents could be impacted by the income requirements for these credits.
For example, a parent’s income could be too high to claim the American Opportunity Tax Credit or Lifetime Learning Credit.
If the student in question has a taxable income of their own and it’s less than the parent makes, it’ll probably be more tax-efficient for the parent to stop claiming the student as a dependent and let the student file their own tax return.
Most of us don’t enjoy filing taxes every year—especially when it comes time to cough up whatever we owe in taxes.
But with IRS schemes like the AOTC, LLC, and the Student Loan Interest Deduction, both parents and students can slash their respective tax bills. It’s just important that you understand the eligibility requirements, filing rules, and options available to you to make sure you’re maximizing your savings.