How to Claim Qualified Education Expenses on Your Tax Return

education expenses

The IRS offers two tax credits to students or those paying for students’ educations, to offset some costs associated with higher education: the lifetime learning credit (LLC) and the American opportunity credit (AOC). Unlike tax deductions, which reduce the amount of taxable income, these credits directly lower the tax itself.

There are several differences between these two education tax credits. Most notably, there is no limit on how many years a student can claim the LLC. The AOC, on the other hand, can only be claimed by the same student up to a maximum of four tax years but might provide a large credit and is also refundable. Students or those paying their tuition may claim either credit, but not both, in any given year.

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What Are Qualified Education Expenses?

Both education tax credits are designed to ease the burden of qualified education expenses, which the IRS defines as “tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools).” The expenses must have been paid during the tax year or in the first three months of the following tax year.

Books, supplies and certain equipment, such as a computer, may be included as qualified education expenses for the tax credits if required for enrollment or attendance. Room and board, transportation, medical expenses and insurance are not eligible to be claimed against the LLC or AOC tax credits. Student fees are also not covered, unless they were required for enrollment or attendance. Expenses paid with tax-free educational assistance and expenses used to claim any other tax deduction or credit are likewise ineligible.

Related: 20 Things to Know About the Child Care Tax Credit

A Breakdown of the Lifetime Learning Credit

All eligible students may claim up to $2,000 of qualified education expenses per return under the lifetime learning credit for as many years as their studies require. This education tax credit is limited to married couples filing jointly who reported less than $128,000 of modified adjusted gross income (AGI) in the tax year, or individuals who reported an AGI less than $64,000.

Students do not necessarily need to be working toward a degree to qualify, but they can’t claim this tax credit if they have any felony drug convictions, if they’re married filing separately, or if they were claimed as dependents by anyone else. Most colleges, universities and vocational schools qualify, but the the individual institution will be able to tell students whether the school is eligible.

The tax credit is figured by taking 20 percent of the first $10,000 of qualified education expenses, but that number (up to $2,000) might be reduced depending on the applicant’s modified adjusted gross income.

Read: How Much Should I Save for My Child’s Education?

Understanding the American Opportunity Credit

The American Taxpayer Relief Act of 2012 extended the American opportunity credit through 2017. The AOC allows up to $2,500 to be credited to each eligible student for as many as four years. Forty percent of the education tax credit for which you qualify that is more than the tax you owe is refundable, the other 60 percent is not, meaning you can get a tax refund of up to $1,000 even if you owe no taxes. Otherwise, every dollar of the credit for which you qualify is deducted from the amount of tax you owe.

The credit’s cutoff for modified adjustable gross income is $180,000 for married couples filing jointly, or $90,000 for most individuals. The American opporunity credit cannot be claimed for more than four years for any single student, and the expenses must have been incurred in the pursuit of a degree or other recognized program. Those who are married and filing separately may not claim the tax credit.

The tax credit is figured by calculating 100 percent of the first $2,000 of qualified education expenses and 25 percent of the next $2,000. The result is a credit of up to $2,500, which may be claimed in full but can be reduced depending on your modified adjusted gross income.

How Do Students Claim These Education Tax Credits?

All eligible students should receive a Form 1098-T from their school by Jan. 31 for the previous tax year. When figuring the amount of either education tax credit, use only the amount you have paid or are deemed to have paid in qualified education expenses, according to your 1098-T. If you file Form 1040 or 1040A, you can claim either the lifetime learning credit or the American opportunity credit by completing Form 8863 and sending it in with your 1040 or 1040A.

Eligible students, or those who claim them as dependents, can lower the cost of higher education by claiming one of two education tax credits offered by the IRS. The credits don’t reduce taxable income, but instead directly lower the amount of taxes owed to the IRS. Even those who don’t owe anything can claim some of the credits. It is up to the student or their financial supporter to make sure the institution they choose is eligible for the credits, and then to figure the credit and file the appropriate paperwork at tax time.