Education Credits – the AOTC and the LLC

Education Credits – the AOTC and the LLC

The American opportunity tax credit permits taxpayers to claim a credit of up to $2,500 for each eligible student for qualified educational expenses. The employer identification number of the educational institution must be disclosed and report only qualified tuition and related expenses actually paid on the Form 1098-T.

The social security numbers for the applicable taxpayers and children must have been issued by December 31st.

Penalties similar to those applicable to the EITC bar a taxpayer who claimed an improper credit from claiming the credit for two to ten years.

Tax return preparers are subject to due diligence requirements for tax returns that claim the child tax credit, similar to the rules for EITC.

Higher income parents, may end up getting little or no net tax benefit from the AOTC or LLC credits (not to be confused that the Tuition and Fee Deduction).  In such cases, the parents might also be getting little or no net tax benefit from the dependency exemption for the student either.  And therefore in such cases the parents may wish to forgo claiming the dependency exemption.  Then the student would file her own Form 1040 and claim the refundable portion of the education credit.  Caution: You need to consider if this procedure may have a negative effect on the parents’ qualifications for FAFSA benefits.