Comparing education tax credits
Monday, August 22, 2022
School is back, and that means homework.
College students and their parents especially need to review some lessons on ways the Internal Revenue Code can help pay many higher education costs.
The table below offers a look at two popular educational tax credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC is the one most undergraduate students (or their parents) will claim. The LLC is for additional educational costs beyond the first four years, including classes you take after getting out of school.
Education Benefits Comparison
Tax Year 2022
|
Criteria |
AOTC |
LLC |
|
Maximum benefit |
Up to $2,500 credit per eligible student. |
Up to $2,000 credit per federal tax return. |
|
Refundable or nonrefundable |
40% of credit (up to $1,000) is refundable |
Not refundable |
|
Limit on modified adjusted gross income (MAGI) for married filing jointly filers |
$160,000 A reduced AOTC amount is available when MAGI is more than $160,000 but doesn't exceed $180,000. |
$160,000 LLC benefits are phased out for MAGI between $160,001 and $180,000. |
|
Limit on modified adjusted gross income (MAGI) for single, head of household, or qualifying widow(er) taxpayers |
$80,000 A reduced AOTC amount is available when MAGI is more than $80,000 but less than $90,000. |
$80,000 LLC benefits are phased out for MAGI between $80,000 and $90,000. |
|
If married, can you file a separate return? |
No |
|
|
Dependent status |
Cannot claim benefit if someone else can claim you as a dependent on their return |
|
|
Can you or your spouse be a nonresident alien? |
No, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status) |
|
|
Number of years of post-secondary education available |
Only if student hasn't completed 4 years of post-secondary education before 2022 |
All years of post-secondary education and for courses to acquire or improve job skills |
|
Number of tax years benefit available |
4 tax years per eligible student (includes any years former Hope Tax Credit, as the AOTC previously was known, was claimed) |
Unlimited |
|
Type of program required |
Student must be pursuing a degree or other recognized education credential |
Student does not need to be pursuing a degree or other recognized education credential |
|
Number of courses |
Student must be enrolled at least half time for at least one academic period beginning in 2022 |
Available for one or more courses |
|
Felony drug conviction |
Students must have no felony drug convictions as of the end of 2022 |
Does not apply |
|
Qualified expenses |
Tuition, required enrollment fees and course materials needed for course of study |
Tuition and fees required for enrollment or attendance |
|
For whom can you claim the benefit? |
|
|
|
Who must pay the qualified expenses? |
|
|
|
Payments for academic periods |
Made in 2022 for academic periods beginning in 2022 or the first 3 months of 2023 |
|
|
Do I need to claim the benefit on a schedule or form? |
Yes, Schedule 3 of Form 1040 and Form 8863, Education Credits; see also Form 8863 Instructions. |
Yes, Schedule 3 of Form 1040 and Form 8863, Education Credits; see also Form 8863 Instructions |
Who can pay the expenses: When it comes to paying for qualified school expenses, both the AOTC and LLC allow for a third party to help here. In these cases, the payments are considered paid by you.
Third parties include generous relatives or friends.
MAGI magic: The Internal Revenue Service uses modified adjusted gross income, or MAGI, in connection with earnings limits on both tax credits.
For most people, MAGI is the amount of adjusted gross income, or AGI, shown on their federal tax return. This is line 11 on Form 1040 or Form 1040-SR.
However, if you claim other tax benefits, they affect your MAGI. It's determined by taking your line 11 amount and adding back the following:
- Foreign earned income exclusion,
- Foreign housing exclusion,
- Foreign housing deduction,
- Exclusion of income by bona fide residents of American Samoa, and
- Exclusion of income by bona fide residents of Puerto Rico.
If you need to adjust your AGI to find your MAGI, worksheets in IRS Publication 970 can help. So can tax software, which most of us use, or your tax professional.
Missing educational tax help: If you haven't claimed education tax breaks for a while, you might be looking for a previously popular one, the tuition and fees tax break. Taxpayers liked this benefit because it was so easy-to claim as an above-the-line deduction.
The tuition and fees write-off was eliminated by the enactment of Taxpayer Certainty and Disaster Tax Relief Act of 2020. But in exchange, Congress increased income limitations for the Lifetime Learning Credit.
That swap actually is a better tax break. The tuition and fees deduction reduced your income, which may or may not (depending on your tax bracket) have helped cut your taxes. But the LLC is a tax credit, which means it's a dollar-for-dollar reduction of any tax you owe. In this tax credit's case, it can zero out any tax you owe.
Refundable vs. nonrefundable credits: Note, however, the LLC is a nonrefundable tax credit. That means if your maximum $2,000 LLC (or any credit amount if your income demands it be reduced) is more than your due tax, your excess credit is lost.
The AOTC, however, is a partially refundable tax credit. Forty percent of up to $1,000 of the AOTC is refundable. In this case, if you don't owe tax, you get the excess refundable AOTC portion back as a tax refund.
No double dipping: Finally, carefully compare the two educational tax credits to ensure you use the one that can help you not only pay college costs, but also reduce your tax bill.
Also be careful about the expenses you use to claim each credit. The IRS, like the family of one of George Costanza's former girlfriends on Seinfeld, frowns on double dipping.
That means that while you can claim both credits the same tax return, for example, the AOTC for your daughter and the LLC for your son, you cannot claim both credits for the same student or for the same qualified expenses.
Also, if you receive tax-free educational assistance, such as a grant, you need to subtract that amount from your qualified education expenses. The IRS has a special No Double Benefits Allowed page with more information on claiming one or more education benefits.
You also might find these items of interest:
- The different ways forgiven student debt is taxed
- 6 tax-smart financial gifts for grads (and the givers)
- Make paying for college a family affair, with contributions from parents, kids & Uncle Sam
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