Higher Education Tax Credits

The two main higher education tax benefits for individuals are the Lifetime Learning Credit and the American Opportunity Credit. Individuals enrolled in post-secondary education can select one of the two credits to decrease their tax bill. Families or spouses can claim the credit if the relevant student qualifies as their dependent.

The Lifetime Learning Credit, created in the Taxpayer Relief Act of 1997, is available for up to $2,000 annually (20% of the first $10,000 spent on higher education) for an unlimited number of years. Qualified students must be enrolled in at least one post-secondary course and need not be pursuing a degree. Eligibility for the credit is subject to an inflation-adjusted income ceiling of $60,000 ($120,000 for joint filers). The value of the credit is phased out as income approaches this ceiling.

The American Opportunity Credit was created by the American Recovery and Reinvestment Act of 2009 (the economic stimulus law) to replace the Hope Scholarship Credit, allowing more individuals to qualify for larger credits. The maximum American Opportunity Credit is $2,500, of which up to $1,000 is refundable (100% of the first $2,000 spent on higher education; 25% of the next $2,000) and can be claimed for the first four years of post-secondary, degree-seeking education. Eligibility is based on an inflation-adjusted income ceiling of $80,000 ($160,000 for joint filers) and the credit is phased out as income approaches that ceiling. The refundable portion of the credit allows beneficiaries who have no tax liability to offset to instead receive a payment from the federal government of up to $1,000. The credit can be claimed for each qualified individual, as opposed to the per-family Lifetime Credit, making the American Opportunity Credit more valuable for families with multiple students enrolled in college.

Qualified education expenses for both credits include tuition and related fees required by an institution for enrollment. The American Opportunity Credit can also be used for required course materials. Other related expenses, such as room and board, transportation, and insurance and medical expenses, cannot be claimed as qualified education expenses for the purposes of these credits.