Global Tax Blog

Education Tax Credits

posted Feb 15, 2013 in the Global Tax Blog

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If you or a dependent is a student you may be able to significantly reduce your tax liabilities by applying for education tax credits. Education tax credits can be claimed in the form of two higher education credits, the American Opportunity Tax Credit and the Lifetime Learning Credit. To report these credits, taxpayers should use Form 8863.

Q: Who is qualified to claim an Education Credit on their return this year?

You may be able to claim an education credit if you, your spouse, or a dependent claimed on your tax return was a student enrolled at or attending an eligible educational institution. The credits are based on the amount of adjusted qualified education expenses paid for or by the student in 2012 for academic periods beginning in 2012 or beginning in the first three months of 2013.

Q: What is an academic period?

An academic period is defined by the IRS as any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible education institution.

Q: What is the American Opportunity Tax Credit (Formerly the Hope Credit)
The American Opportunity tax credit is a credit of up to $2,500 (an increase from $1,800) for qualified education expenses and up to 40% is refundable. This credit can be claimed for any of the first four years of college. Unfortunately, post graduate work does not apply, but the Lifetime Learning Tax Credit can be used for that. The student must meet the required qualifications and certain income restrictions apply (see the chart below).

This credit can be used for:

  • Tuition & fees
  • Course materials
  • Computers

Q: What is the Lifetime Learning Tax Credit
This credit equals 20% of qualified education expenses, up to a maximum of $10,000 of qualified expenses (maximum credit is $2,000 per year) for qualified tuition and related expenses.

The student must meet the required qualifications and certain income restrictions also apply (see the chart below).

This credit can be used for tuition and fees for attendance at any:

  • College
  • University
  • Vocation School
  • Postsecondary Education Institution

Comparison of Education Credits
Caution.  You can claim both the American opportunity credit and the lifetime learning credit on the same return-but not for the same student.

  American Opportunity Credit Lifetime Learning    Credit
Maximum creditUp to $2,500 credit per eligible studentUp to $2,000 credit per return
Limit on modified adjusted gross   income (MAGI)$180,000 if married filing jointly;
$90,000 if single, head of household, or qualifying   widow(er)
$124,000 if married filing jointly;
$62,000 if single, head of household, or qualifying   widow(er)
Refundable or nonrefundable40%  of credit may be refundable; the rest is nonrefundableNonrefundable—credit limited to the amount    of tax you must   pay on your taxable income
Number  of years of postsecondary educationAvailable ONLY if the student had not completed the first 4 years of postsecondary education   before 2012.Available for all years  of   postsecondary education and for courses to acquire or improve job skills
Number  of tax years credit  availableAvailable ONLY for 4 tax years  per eligible student (including any   year(s) Hope credit was claimed)Available for an unlimited number of years
Type of program requiredStudent must be pursuing a program leading  to a degree or   other recognized education credentialStudent does   not need to be pursuing a program leading to a degree or other   recognized education credential
Number  of   coursesStudent must be enrolled  at least   half time for at least one academic period beginning during the yearAvailable for one or more courses
Felony drug convictionAs of the end of 2012, the student had not been convicted of a felony for possessing or distributing a controlled  substanceFelony drug convictions do not make    the student   ineligible
Qualified  expensesTuition, required  enrollment fees,  and course materials that the student needs for a course of study   whether  or not the materials are bought  at   the educational institution as a condition of enrollment or attendanceTuition and required  enrollment fees    (including amounts   required  to be paid   to the institution for course-related   books, supplies, and equipment)
Payments for academic periodsPayments made in 2012 for academic periods   beginning in 2012 or beginning in the first 3 months of    2013


Education credits can significantly increase your tax savings, however additional restrictions may apply. For help determining if you or a dependent qualify for education tax credits please contact any member of the KLR Tax Services Team or call us at 888-857-8557.