The Taxpayer Relief Act of 1997 (Public Law 105-34 (111 Stat. 788 (TRA '97)) added section 25A to the Internal Revenue Code to provide the Hope Credit (Currently modified as the American Opportunity Tax Credit by the American Recovery and Reinvestment Act of 2009) and the Lifetime Learning Credit (education credits). On November 17, 1997, the IRS published Notice 97-60 (1997-46 I.R.B 8) to provide general guidance on the higher education tax incentives enacted by TRA '97. In general, the American Opportunity Tax Credit and the Lifetime Learning Credit allow taxpayers to claim a credit against their federal income taxes for certain post-secondary educational expenses. Additionally, 40 percent of the American Opportunity Tax Credit (up to $1,000) is now a refundable credit.
TRA '97 also added section 6050S to the Code, which requires eligible educational institutions to file information returns to assist taxpayer and the IRS in determining the education credit that taxpayers may claim under section 25A.
The following is general information only and should not be taken as tax advice. Please consult the IRS or a tax professional, or see the Resources and Frequently Asked Questions for more information.
The American Recovery and Reinvestment Act of 2009 (ARRA) expanded and renamed the Hope Credit to the American Opportunity Tax Credit. The American Opportunity Tax Credit is available for the first four years a student is enrolled in higher education and carrying at least half-time workload while pursuing a degree or other recognized education credential.
To be eligible to claim the AOTC, the law required a taxpayer (or a dependent) to have received Form 1098-T, tuition Statement, from an eligible educational institution, whether domestic or foreign. You cannot claim credits if your filing status is married and filing separately or you are claimed as a dependent on another person's tax return (such as your parents' return). To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
The maximum annual credit is $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amounts of the credit (up to $1,000) refunded to you. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of the qualified education expenses you paid for that student.
Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. For AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expense even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.
Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses: (1) room and board, (2) insurance, (3) medical expense (including student health fees), (4) transportation or (5) similar personal, living or family expenses.
The law required that both you and your qualifying student have a valid Social Security number or Induvial Taxpayer Identification Number, issued before the due date of your tax return, in order to claim AOTC.
Expenses for sports, games, hobbies or non-credit courses do not qualify for the education credits or tuition and fees deduction, except when the course or activity is part of the student's degree program. For the Lifetime Learning Credit (LLC) only, these expenses qualify if the course helps the student acquire or improve job skills.
If the taxpayer is claiming a Lifetime Learning Credit for a particular student, none of that student’s expenses for that year may be applied toward the American Opportunity Tax Credit.
For more information about the American Opportunity Tax Credit, call the IRS at 1-800-TAX-1040 or visit their web site at www.irs.gov.
The Lifetime Learning Credit (LLC) is for qualified tuition and related expense paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses - including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
To claim the LLC, you must meet all three of the following: (1) you, your dependent or a third party pay qualified education expenses for higher education, (2) you, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution, and (3) the eligible student is yourself, your spouse or a dependent you listed on your tax return.
To be eligible for LLC, the student must: (1) be enrolled or taking courses at an eligible educational institution, (2) be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills, or (3) be enrolled for a t least one academic period beginning in the tax year.
To be eligible to claim the LLC, the law required a taxpayer (or a dependent) to have received Form 1098-T, tuition Statement, from an eligible educational institution, whether domestic or foreign. You cannot claim credits if your filing status is married and filing separately or you are claimed as a dependent on another person's tax return (such as your parents' return). For tax year 2020, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $59,000 and $69,000 ($118,000 and $138,000 if you file a joint return). You cannot claim the credit if your MAGI is $69,000 or more ($138,000 or more if you file a joint return). Taxpayers cannot use both the American Opportunity Tax Credit and Lifetime Learning Credit for the same student in a single year.
The amount of the credit is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return. The LLC is not refundable. So, you can use the credit to pay any tax you owe but you will not receive any of the credit back as a refund.
If you are eligible to claim the LLC and are also eligible to claim the AOTC for the same student in the same year, you can choose to claim either credit, but not both.
For more information about the Lifetime Learning Credit, call the IRS at 1-800-TAX-1040 or visit their website at www.irs.gov.