Currently there are two educational tax credits allowed by the IRS, the American Opportunity Tax Credit (AOTC), and the Lifetime Learning Credit (LLC).  The goal of this article is to define these two credits and discuss some of the common questions regarding their use.

The AOTC is a credit for qualified educational expenses paid for an eligible student for the first four years of post-secondary education.  The credit is calculated as 100 percent of the first $2,000 of qualified expenses plus 25 percent of the next $2,000 of qualified expenses.  The AOTC is worth up to $2,500 per student and 40 percent of the credit is refundable if certain qualifications are met.  A refundable tax credit will create a refund for the taxpayer, even when no tax is due.

To be eligible for the AOTC, the student must be pursuing a degree or other recognized educational credential, be enrolled at least half time for at least one academic period beginning in the tax period, not have finished the first four years of higher education at the beginning of the tax year, and not have previously claimed the AOTC or the former Hope credit for more than four tax years.

Unlike the AOTC, the LLC does not have a refundable portion and the credit is limited to the amount of tax you must pay on your taxable income. The credit is calculated as 20 percent of qualifying educational expenses and is limited to $2,000 per tax return.  Unlike the AOTC, which is only allowed for the first four years of undergraduate schooling, the LLC is available for any qualifying education expenses.

For both credits, if you are claimed as a dependent of another person, you cannot claim the credit on your own tax return.  The person claiming you as a dependent is eligible to claim the tax credit.  Each credit does have some income phase out criteria based upon your adjusted gross income and filing status, so for some higher income individuals there may be some limitations.  If the tax return is filed as Married Filing Separately, the credit is not allowed.

Qualifying educational expenses for both credits generally include tuition, required fees, books and supplies.  Room and board and transportation expense are not included.

Some of the questions we hear from clients include the following:

  1. My child started college this year and also earned $5,000 from his part time job.  Is it best to claim the credit on their tax return, or the parents tax return?    Generally, the parents have greater income, and it is more advantageous for them to claim the child as a dependent and the parents take the credits.  Assuming the parent’s income is low enough, they will receive a $2,500 credit, whereas the child would have received only $1,000. 
  • I paid $10,000 for the tuition, books, and fees for my grandchild to attend college this year.  Can I deduct these or get an educational credit for them?  You must be claiming the person on your tax return to be eligible for the credit.  If the parents are claiming the child, they can claim the credit, even though the grandparents paid the qualifying college expense. 
  • I enrolled in a taxidermy school and paid tuition and purchased supplies to learn taxidermy.  Can I deduct this?  Educational expenses generally must be paid to a post-secondary school that has accreditation and is approved to issue financial aid through the US Department of Education.  The schools’ business office will issue a Form 1098-T which will document the eligible college expenses.  Most main line colleges and technical schools are a part of this program.  If in doubt, check with the school prior to enrolling
  • My child is a Junior in high school and has enrolled in dual enrollment classes at a local college.  We must pay a portion of the cost.  Is this eligible for a college credit? 
    Yes, the qualifying education expenses that must be paid by the student do qualify for the educational credits.  Unless the student is carrying at least a half time class load, the Lifetime Learning Credit would be the only credit they would qualify for.
  • I am a teacher and every year I take a college class or two to maintain my teaching certification.  Do the educational credits apply to this?  Yes, as long as your employer does not reimburse you for the cost.  This is the perfect place for the lifetime learning credit to be used to defray 20% of the required costs.  Make sure you receive the form 1098-T from the college.

By starting to save early for college, and with the use of these credits, higher education may be more attainable than you thought.  Please contact your Ketel Thorstenson tax advisor to discuss specific details regarding educational tax credits and planning for college.

Visit to view the IRS instructions for Form 8863. It provides a side-by-side comparison of the American Opportunity Tax Credit and the Lifetime Learning Credit.