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How to Prepare your Education Tax Credit

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What is Education Tax Credit?

Are you or is your dependent a student? Then you might want to determine whether you qualify for one of two education tax credit covering typical student expenses. You can skip paying federal income taxes if you use an education tax credit to cover expenses other than the money in a 529 college savings plan.

education tax credit
education tax credit

What is American Opportunity Credit, AOTC

The American Opportunity Credit can save up to $2,500 in taxes on the education expenses of every qualified student. To give students and their families financial and tax relief, the federal government has created education tax credit that can reduce the costs of going to school.

The American Opportunity Tax Credit is available during the first four years of college, so if you are eligible, you (or your parents, if you are a dependent) could claim it while you are still at school. The AOTC is an education tax credit that taxpayers can take to help pay some of the costs of going to college during the first four years a student is in school for a postsecondary degree. You can claim the AOTC for your first four years of higher education and get a credit worth up to $2,500 each year.

What is Lifelong Learning Credit, LLC

The Lifelong Learning Credit is available for undergraduate students who have not completed the first four years of postsecondary education. There is a limitless number of times the Lifetime Learning Credit may be claimed, making the lifetime learning credit a valuable tax deduction for college students returning for postsecondary study. In addition, eligible students who take courses (including courses for job skills acquisition or improvement) at qualified colleges, universities, vocational schools, or other postsecondary institutions may claim the lifetime learning credit.

You may be eligible to use the Lifetime Learning Credit (LLC) to help cover qualified tuition and related student expenses paid by eligible students enrolled at a postsecondary educational institution, including bachelor’s, master’s, and professional degree courses. Qualifying expenses you can claim under the Lifetime Learning Credit include tuition and fees, along with books, supplies, and equipment, so long as the tuition and fees are required to enroll. Payment means that a parent or student may be eligible, depending on who pays for a student’s tuition at college. That means if you are a parent with two dependent children enrolled in grad school, you could be eligible for as little as $2,000, no matter how much tuition and related expenses you are paying.

The Lifetime Learning Credit (LLC) is not refundable, meaning the Lifetime Learning Credit may help bring your tax bill down to 0, but you do not receive any excess amounts as a tax refund. Fortunately, provisions within the US tax code offer tax breaks on education as credits or deductions for the different expenses you owe.

What are some other Tuition Tax Deduction

With the Tuition & Fees Deduction, you could lower your taxable income by up to $4,000 for the tuition and fees you paid at qualifying postsecondary institutions. Like the Lifelong Learning Credit, you must reduce qualified expenses by the amount of help you receive through scholarships, grants, Pell Grants, employer tuition assistance, refunds from schools, and other nontaxable assistance. In addition, you can boost an education tax credit and lower your overall tax bill or boost your tax refund if a student (you, your spouse, or a dependent) decides to count all or a portion of some scholarships or fellowships as income.

If a education tax credit reduces your tax bill to zero, you can have up to 40% of the remaining amount, up to $1,000. A nonrefundable credit may lower your tax bill, but you will not get any money back. A refundable credit can earn you money back when the credit is worth more than the taxes you owe. That means that if your education tax credit reduces the amount of tax you owe to zero, you could receive the money back as a tax refund.

This tax deduction is available alongside the other tax deductions and credits. If you are eligible for both credits, you should pick which provides you with the most significant tax savings. For example, if you provide more than half of your financial support (even if you are using student loans), you may claim either the education tax credit or tax deduction. If you are still wondering whether you are eligible for this education tax credit.

Check out our Tax Calculator for tax deduction and tax return estimates.

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