Education tax credits help decrease the costs of higher education by reducing the amount of taxes households with eligible students owe. In some cases, filers can even qualify for tax refunds.
American Opportunity Tax Credit
The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the American Opportunity Tax Credit (AOTC) permanent. This credit expands the previous Hope Credit and can make education more affordable for lower-income families and students who might not otherwise be able to attend college.
Lifetime Learning Credit
For students not pursuing a degree, the Lifetime Learning Credit (LLC) is available at any point in their post-secondary education. Workers may use the LLC to improve job skills which can increase their earning ability. Unlike the AOTC, this credit only reduces income tax, and won’t benefit filers that do not owe tax.
Filers may be eligible for the education tax credits if:
- They paid for “qualified educational expenses,” during the tax year or the first three months of the next year for themselves, their spouse, or their dependents, at an “eligible educational institution.” These institutions include colleges, universities, vocational schools, and accredited schools eligible to participate in Student Aid programs of the U.S. Department of Education.
- The student is enrolled for at least one academic period beginning in the tax year. Academic periods can be semesters, quarters, or any other period of study as defined by the school. For the AOTC, students must be enrolled at least part-time, whereas for the LLC, students must be enrolled in at least one course. For the AOTC, the student is not required to claim the credit for a particular year during the 2-or- 4-year program they are enrolled in. If a student cannot benefit from the credit because their expenses are low, they can claim the credit another year during their enrollment.
- The student is pursuing a program leading to a degree or another recognized education credential. For the LLC, students may also be working to acquire or improve job skills.
- They don’t have a filing status of married filing separately.
- They were not considered a nonresident alien for tax purposes during 2022.
- They cannot be claimed as a dependent on someone else’s tax return.
- They are a nonresident alien who is married and files a joint return with a U.S. citizen, OR they are a dual-status alien who chooses to be treated as a U.S. resident for the entire year. For more information see IRS Education Credits Q&A.
- They have modified adjusted gross income (MAGI) in 2022 less than the following amounts:
|Credit||Single Filers||Married Filers|
|American Opportunity Tax Credit||$80,000||$160,000|
|Lifetime Learning Credit||$80,000||$160,000|
If your MAGI is $80,000-$90,000 (single filers) or $160,000-$180,000 (married filers), your credit amount will be reduced. You cannot claim the AOTC or Lifetime Learning Credit if your income is more than these amounts.
The following additional requirements apply for the American Opportunity Tax Credit. The student:
- Has not claimed any education tax credits for four prior tax years.
- Has not completed 4 years of higher education before 2022.
- Does not have a felony drug conviction.
- Has a taxpayer identification number (SSN, ITIN, or ATIN) by Aril 18, 2023.
- Provides the educational institution’s employer identification number (EIN) on Form 8863
Qualified Education Expenses
Qualified educational expenses include:
|American Opportunity Tax Credit||Lifetime Learning Credit|
The following do not count as qualified educational expenses:
- Medical expenses
- Room and board
- Other living or family expenses
- Child care
Note: Students can decide how to allocate their education expenses so that it benefits them. When Pell Grants or other scholarships are used to pay tuition, they are considered tax-free income, but those tuition expenses may not be claimed for the AOTC. In some situations, it is more helpful to put the Pell Grant (or other scholarship) toward living expenses. The Grant will then be taxable to the student, but the larger AOTC may more than offset any increase in tax. See, “Coordination with Pell Grants and other scholarships” in IRS Publication 970, “Tax Benefits for Education” or the Pell Grants and Tax Credits Fact Sheet.
Starting July 1, 2022, the government expanded the Pell Grant program to allow more people who are incarcerated in a federal or state penitentiary to receive financial support while participating in prison education programs. To learn more, see this U.S. Department of Education announcement.
American Opportunity Tax Credit
The AOTC is worth up to $2,500. The AOTC is figured by taking the first $2,000 paid towards the student’s qualified educational expenses and adding 25 percent of the next $2,000 in educational expenses, up to $2,500.
Up to $1,000 (or 40 percent of the total credit) is refundable even if a filer doesn’t owe income tax. If you don’t owe any taxes, you will receive the entire $1,000 as part of your tax refund. If tax is owed, the balance of the credit is used to reduce the filer’s tax liability first and then any remaining amount will be sent as part of your tax refund.
For example, Maggie earned $26,000 in 2022 and attended college half-time working toward her degree. Her tuition for the year was $5,000. She owes $1,361 in federal income tax. She qualifies for a maximum AOTC of $2,500 (first $2,000 in expenses + 25% of the next $2,000 in expenses):
- Maggie qualifies for a refundable credit of $1,000 (40% of $2,500), which is subtracted from her maximum credit of $2,500, leaving a balance of $1,500. The non-refundable $1,500 portion is applied to her $1,361 tax bill, which reduces her tax bill to $0. (Since this part of the credit is non-refundable, Maggie doesn’t get the remaining $139.) Now that Maggie no longer owes any taxes after the non-refundable portion of the credit is applied, she will receive the $1,000 refundable portion as part of her tax refund.
Lifetime Learning Credit
The credit is 20 percent of the first $10,000 of qualified educational expenses, up to $2,000 per household, regardless of the number of eligible students in the family. Unlike the AOTC, this credit is non-refundable.
Claiming the Credits
To claim either tax credit, filers must submit Form 8863, “Education Credits” with their tax return.
Students usually receive a Form 1098-T, “Tuition Statement” from their institution by January 31st of the following year. This form is used to help determine the amount of qualified educational expenses that filers can claim.
For more information, see the IRS Tax Benefits for Education Information Center.