American Opportunity Tax Credit (AOTC):
Credit Amount: Offers a maximum annual credit of up to $2,500 per eligible student. This is calculated as 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000.
Eligibility: Available for the first four years of post-secondary education. The student must be pursuing a degree or other recognized education credential and be enrolled at least half-time for at least one academic period during the tax year.
Refundability: If the credit brings your tax liability to zero, 40% of the remaining credit amount (up to $1,000) can be refunded to you.
Lifetime Learning Credit (LLC):
Credit Amount: Provides a credit of up to $2,000 per tax return, calculated as 20% of the first $10,000 of qualified education expenses.
Eligibility: Available for all years of post-secondary education and for courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit.
Key Considerations:
Income Limits: Both credits have income thresholds. For the AOTC, the credit phases out for taxpayers with modified adjusted gross income (MAGI) above $80,000 ($160,000 for joint filers) and isn't available for taxpayers with MAGI above $90,000 ($180,000 for joint filers). The LLC phases out between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).
No Double Benefits: You cannot claim both the AOTC and LLC for the same student in the same tax year. Additionally, you cannot use the same expenses to claim both credits or to claim a deduction.
Form 1098-T: Ensure you receive Form 1098-T from the educational institution, which reports the amounts paid for qualified tuition and related expenses. This form is necessary to claim either credit.
By understanding and utilizing these education credits, parents can effectively manage education expenses and reduce their tax burden.