Make Education More Affordable with Tax Credits

Let’s be honest, costs across-the-board are increasing for American citizens, and making ends meet is getting tougher for people. The impact of these ever-rising costs is having the greatest impact on working and middle-class Americans. For generations, education has proven to be the best pathway to opens doors that may have previously been closed to people and to improve one’s economic status. Unfortunately, it is also true that this phenomenal opportunity that has lifted millions out of poverty is becoming less attainable to many people as a result of skyrocketing costs in the U.S. This, coupled with the rising costs of goods and services in nearly every other sector (such as groceries), is making the attainment of higher education more financially burdensome and increasingly out of reach for a substantial portion of the population. Fortunately, there are several tax benefits available to families that can significantly ease this burden. In this article, we will summarize two of the most popular education-based tax saving tools that are available to your family.

Can expats claim either credit?

U.S. expats living and studying abroad should make thoughtful considerations and exercise sound judgement before attempting to claim either credit. Technically, U.S. persons living abroad are able to claim these credits if they meet the criteria listed below with a couple of critical caveats. The first is that the foreign educational institution must be eligible to participate in the federal student aid program. You can search for eligible schools here. Unfortunately, as of the time of this article’s publication, there are only a small number of schools in Africa, Asia, South America and the Caribbean. The other major caveat is that you cannot take the Foreign Earned Income Exclusion and also claim either of the credits. The financial impacts of choosing either option should be seriously considered.

American Opportunities Tax Credit (AOTC)

The American Opportunities Credit (AOTC) is one of the two education credits designed to offset the costs of higher education via tax savings. If you meet the qualifying requirements, you can claim a tax credit of up to $2,500 for each eligible student per year. Tax credits reduce the amount of income that may be considered in determining your taxable income. Another perk of the AOTC is that 40% of the credit is refundable. Put simply, if the amount of qualifying educational expenses exceeds the $2,500 cap, 40% of the excess can be carried forward to the next year for a credit. As long your modified adjusted income does not exceed $90,000 if you file single, or $180,000 if you are married filing jointly, the AOTC can be used by each eligible student for the first four years of higher education.

In order to receive the AOTC, the following minimum requirements must be met:

• You must have paid higher education expenses.

• You paid the education expenses of an eligible student.

• The eligible student must be you, your spouse or someone that you can claim as a dependent.

What is an eligible student?

There are four standards that must be met for one to be considered an eligible student. They are as follows:

1. The student must not have completed the first four years of post-secondary education.

2. The AOC must not have been claimed by anyone for the student for any four tax years prior to 2025. Because the AOTC does not have to be claimed in consecutive years, this essentially means that it cannot have been claimed for total years prior to 2025. For example, if you claimed the credit in only two tax years prior to 2025, the standard for this requirement would be met.

3. The student must be enrolled at least half time in a post-secondary institution that leads to a recognized educational credential (such as a bachelor’s degree).

4. The student could not have been convicted of a state or federal felony for distributing a controlled substance.

What are qualified education expenses?

• Tuition and related expenses required for enrollment at an eligible institution.

• Any college, university, vocational school, or other post-secondary school that is eligible to participate in the U.S. Department of Education federal student aid program.

• Only those expenses that are required as a condition of enrollment are permitted to be included in related expenses.

• The following expenses do not qualify:

  • Insurance;

  • Room and board;

  • Medical expenses such as student health services;

  • Transportation; and

  • Similar personal, family or living expenses.

Lifetime Learning Credit

If qualifying for the AOTC is not possible, a good alternative is the Lifetime Learner Credit (LLC). Although the maximum that one can claim for the LLC is slightly lower than the AOTC at $2,000, it provides more flexibility. Though the minimum requirements and qualifying factors are the same or vary slightly, other conditions provide students with access to an education tax credit that would not otherwise be available under the American Opportunity Tax Credit. However, key differences that you must be aware of include:

• The LLC credit is per return for all eligible students, not for each eligible student as is the case with the AOTC. This means that if there were three eligible students on a single return with $10,000 in qualified expenses, $2,000 is the maximum that could be claimed. On the other hand, under the AOC each student could claim $2,500 for a total of $7,500.

• The maximum amount that may be claimed is 20% of the first $10,000 of qualifying education expenses. For example, if the total amount of qualifying education expenses on a return is $8,000, the maximum amount that could be claimed under the LLC is $1,600 ($8,000 X 20%).

• This differs from the AOTC as it allows for 100% of the first $2,000 and 25% of the next $2,000. Thus, if a student had $4,000 of qualified educational expenses, they could claim the full $2,500 credit.

• The LLC can be used for an unlimited number of years if the qualifiers are met.

• It is not required that you or your dependent be enrolled in a program that leads to a degree or other certification.

• Previous drug felony drug convictions do not disqualify you from receiving the credit.

• The credit is fully available for any number of years and can be used for post-secondary education and career improving skills.

• On the downside, as opposed to the AOTC, the credit is nonrefundable. In summary, this means that you may not be able to reap the full benefit of the credit once the amount of taxes you owe is reduced to zero.

Checking Your Eligibility for These Credits

The IRS has a tool called the Interactive Tax Assistant to help you determine whether you can claim an education credit. You can access it by clicking here.

In Summary

As you can see there are some great benefits to using these two credits. Remember, you cannot use both credits for the same student in the same year. Let us help you find the credit that works best for your particular situation by clicking here.

The information in this article is for education and informational purposes only and does not constitute professional tax, legal, or financial advice. Because tax laws are complex and subject to change, it is always best to consult with a qualified tax professional regarding your specific situation.