Education Credits – the AOTC and the LLC
Education Credits – the AOTC and the LLC
The American opportunity tax credit (AOTC) permits taxpayers to claim a credit of up to $2,500 for each eligible student for qualified educational expenses. Qualified educational expenses generally are incurred within the first four years of post-secondary study on a more than half-time matriculating basis. 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 Lifetime Learning Credit (LLC) permits taxpayers to claim a credit of up to $2,000 on a tax return for qualified educational expenses. Qualified educational expenses generally are post-secondary study to acquire or improve job skills.
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 with the Tuition and Fees 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 his or her own Form 1040 and possibly claim the refundable portion of the AOTC education credit. Caution: You need to consider if this procedure may have a negative effect on the parents’ qualifications for FAFSA benefits. (see additional restrictions on refundable portion, below)
The AOTC or LLC credits may only be claimed by the child-student if the parent(s) DO NOT claim the credit (and/or CHOOSE NOT TO DO SO) and also DO NOT claim the child as a dependent (and/or CHOOSE NOT TO DO SO).
But: Student-Taxpayers under age 24 CANNOT claim any part of the AOTC credit as refundable if all of the following three conditions apply to them:
- The taxpayer is either:
• Under age 18 at the end of the tax year, or
• Age 18 at the end of the tax year and had earned income
of less than one-half of his or her support, or
• A full-time student over age 18 and under age 24 at the end
of the tax year with earned income of less than one-half of
his or her support, - At least one of the taxpayer’s parents was alive at the end of
the tax year, and - The taxpayer is filing as Single, Head of Household, Qualifying
Widow(er), or Married Filing Separately for the tax year.
The Tuition and Fees Deduction may only be claimed by the child-student if the parent(s) CANNOT claim the deduction. If the parent(s) merely choose to not claim the deduction or merely choose to not claim the child as a dependent, then the child-student is prohibited from claiming the tuition and fees deduction.
Compare Education Credits and Tuition and Fees Deduction
IRS Publication 970 – Tax Benefits for Education
About IRS Form 8862, Information To Claim Earned Income Credits After Disallowance
About IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)