When students and their families are trying to figure out how to pay for college, they sometimes overlook an important financial resource: student tax credits.
These are educational tax benefits available to help lower the taxes charged to students and their families. This leaves more funds available to cover college costs.
There are three main student tax credits and benefits that can help students and their families:
- American opportunity tax credit (AOTC)
- Lifetime learning credit (LLC)
- Tuition and fees deduction
However, a tax filer can only claim one of these benefits per student on a tax return. You can’t apply multiple student tax credits to the same student or educational expenses.
So which student tax credit will help you the most? Here’s what you need to know.
How to choose the best student tax credit
Since you can only claim one student tax credit or deduction per student, you’ll want to choose wisely. After all, claiming the most beneficial student tax credit could get you thousands of the dollars you spent on educational costs back.
To help you quickly decide, here’s a look at each student tax credit or deduction, starting with the most beneficial.
1. American opportunity tax credit
When it comes to student tax credits, the AOTC is the most advantageous. As a tax credit, it directly lowers your tax liability by crediting any funds you spend in a year directly on educational costs like tuition, fees, and course materials in a tax year.
The AOTC can lower your tax bill by up to $2,500. You’ll receive a credit of “100 percent of the first $2,000, plus 25 percent of the next $2,000” spent on qualifying purchases, according to the IRS.
This tax credit is also refundable up to 40 percent ($1,000) of the credit. So even if a tax credit lowers your tax burden to $0, you could get an additional refund of up to $1,000. Because it’s a refundable tax credit, the AOTC offers the most monetary value of any student tax credit.
But it also comes with specific limits.
- Modified adjusted gross income (MAGI) of no more than $80,000 ($160,000 for joint filers) to claim this student tax credit.
- The student must be enrolled at least half-time in a recognized post-secondary educational program leading to a degree or certification.
- They must be in their first four years of postsecondary education (and must not have claimed the AOTC for four years).
- The Student may not have a conviction for a felony drug offense.
For a student who is in the first four years of college or vocational training, the American opportunity tax credit will likely be the most advantageous student tax credit to claim.
“If you have the choice, the American opportunity [tax] credit will always be greater than the lifetime learning credit,” the IRS states.
But if you don’t meet the qualifications above, you might still benefit from another student tax credit.
2. Lifetime learning credit
The LLC is another tax benefit that deducts up to $2,000 worth of educational expenses from a filer’s tax burden.
Filers who claim this tax benefit can credit 20 percent of all educational expenses, up to $10,000. Unlike the AOTC, you have to spend a lot more to receive the full benefit of the LLC.
What’s more, the LLC is also nonrefundable. That means it can only reduce a taxpayer’s burden to $0 — and won’t result in a refund.
However, the LLC does not have the same restrictions as the AOTC. A filer can only claim the latter for four tax years per student. With the LLC, there is no limit on how many years a filer can claim it.
Here are the requirements for claiming the LLC.
- MAGI of under $65,000 ($131,000 for married filing jointly), with benefits beginning to phase out at $55,000 MAGI ($111,000 for married filing jointly).
- The student must be yourself, your spouse, or claimed as a dependent on your tax return.
- Educational expenses must be for a student enrolled in one or more courses at an eligible college of learning institution.
- Qualifying educational expenses include only those required for enrollment and paid directly to the institution, such as tuition and supplies fees.
Overall, the LLC is still an excellent way to lower your tax burden and offset the cost of college. It might even apply more broadly to help nontraditional students. You could use the LLC to write off job training, certifications, or career-required continuing education courses.
3. Tuition and fees deduction
Lastly, you might be able to write off educational expenses with the tuition and fees deduction. Unlike student tax credits, this deduction does not directly lower your taxes owe, but rather decreases your taxable income by up to $4,000.
Here are the main eligibility guidelines for the tuition and fees deduction.
- MAGI must be $80,000 or less ($160,000 for married filing jointly).
- Tuition, fees, or course materials must be required for enrollment and paid directly to the college to be deductible with this benefit.
- The student must be you, your spouse, or a tax-claimed dependent enrolled in one or more courses at a qualified school.
Because it lowers your taxable income and not your actual tax burden, it’s unlikely that the tuition and fees deduction will help you as much as student tax credits.
However, according to the IRS, “This deduction may be beneficial to you if you don’t qualify for the American opportunity [tax credit] or lifetime learning credits.”
If you take a college course but aren’t working toward a degree yet have a MAGI of $75,000, you wouldn’t qualify for either student tax credit discussed above. But, you could write off your tuition through the tuition and fees deduction.
Only claim a student tax credit if you’re eligible
Overall, the AOTC is most beneficial. However, which tax credit you can claim will depend on your situation and your eligibility.
When the time comes to file taxes, do your due diligence and ensure you are rightfully claiming a student tax credit. And if you’re unclear which is best, it might be time to consult a tax professional.