What Is Education Tax Credit

What is education tax credit on taxes? How to qualify for education tax credit? What are the income limits for the education tax credit? Claiming the education tax credit is easy, as long as you are one of the people who qualifies for education tax credit.

Education Tax Credit Taxes

The 2020 Education Tax Credit is the name for two separate education tax credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

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American Opportunity Tax Credit 2020

The American Opportunity Tax Credit for 2020 is $2,500 maximum. The American Opportunity Tax Credit allows you to claim all of the first $2,000 you spent on tuition, fees and equipment. Most full-time students hit $2,000 on tuition and fees alone.

You also get to claim 25% of the next $2,000. That means you need to spend $4,000 to get the full credit. You get $2,000 credit for the first $2,000 and then $500 (25% of $2,000) for the next $2,000. Again, many full-time students will hit the $4,000 just with their bill from the university.

You cannot claim living expenses like dorm room fees, but you can claim equipment you buy including laptop computers, tablets, and iPads that you use for school, so if you haven’t spent the full $4,000 and you have some educational purchases to make, go ahead and make them.

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As always save your documentation including a copy of your bill from the university or college, and the receipts for any equipment you buy to maximize the credit.

Qualify for American Opportunity Credit

To qualify for the American Opportunity Credit, your modified adjusted gross income (MAGI) must be less than $80,000 if you file single, or $160,000 if you file jointly to get the full credit amount. If your MAGI is between $80,000 and $90,000 for single filers, or between $160,000 and $180,000 for joint filers, you get a reduced credit.

Students with incomes above those limits cannot claim the American Opportunity Credit. However, they still may be able to deduct tuition and fees.

Lifetime Learning Credit 2020

Another education credit available is the Lifetime Learning Credit. The 2020 Lifetime Learning Credit allows students to claim 20% of the first $10,000 of qualified education expenses paid toward tuition, fees, and supplies for coursework.

Qualified education expenses for the Lifetime Learning Credit are expenses that are required for enrollment. So, if your university charges a mandatory $50 fee for administration expense, or the like, that is deductible.

Unlike the American opportunity credit, you cannot claim books or other supplies and expenses that are not required for enrollment. Even though that laptop is necessary for you to take Psychology 101, it does not qualify for purposes of the Lifetime Learning Credit.

To claim the Lifetime Learning Credit, you need to get a Form 1098-T from your college, university, or higher-education school.

Qualify Lifetime Learning Credit

As the name implies, you can use the lifetime learning credit throughout your life, not just your first undergraduate degree. Graduate school qualifies for the lifetime learning credit as does law school, and medical school. All you need is for your college or university to send you a 1098-T.

Like the American opportunity credit, the lifetime learning credit has income limits. The income limits for the lifetime learning credit in 2020 are $59,000 if you are filing single, and $118,000 if you are married filing jointly. You may claim a reduced credit that phases out between $59,000 and $69,000 if single, and $118,000 to $138,000 if you are filing joint. Above that you make too much to qualify for the lifetime earning credit.

Where to Put Education Credits on My Taxes

Use Form 8863 to calculate your education credit. The American opportunity credit uses Form 8863, as does the lifetime learning credit.

Once you have calculated the amount of your education credits, enter Schedule 3.

Education Credits with 529 Plan

One of the best tax tricks is to pair education credits with a 529 plan.

Many states give you a state tax deduction for contributions to the state’s 529 plan. All capital gains and interest earned inside the 529 plan are tax-free. So, when you withdraw money from a 529 plan and use it to pay for education expenses that you then get an education credit for, you get the double benefit of using state tax-free money, and tax-free gains and earnings.

About the Author

By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or tax advice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own tax professional when making decisions regarding your tax situation.

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