Should I apply for the American Opportunity Tax Credit or the Lifetime Learning Credit?

You pay dearly for your college education, so it is right that the government does not throw salt in the wound by forcing you to pay taxes on the money you spend on your studies. It offers several tax breaks for those enrolled in a higher education program, including interest deductions on student loans and tax-free scholarships if that money is directly spent on education expenses.

The American Opportunity Tax Credit and the Lifetime Learning Credit are two of the most lucrative tax breaks for education. But you can’t claim them both in the same year. Here’s what you need to know to decide which one is right for you.

Image source: Getty Images.

U.S. opportunity tax credit

The American Opportunity Tax Credit can reduce your tax bill by up to $ 2,500. You can get 100% credit on the first $ 2,000 you spent on tuition, books, and other class essentials, as well as 25% on the next $ 2,000. Money spent on transportation or room and board does not count towards this tax credit. Up to $ 1,000 of the tax credit is refundable, which means it can lower your tax bill below zero. So even if you owed no tax during the year, you could file a return and claim the US Opportunity Tax Credit, and the government would send you a refund check for $ 1,000.

You, or the student whose education you are paying for, must be enrolled at least half-time in a recognized undergraduate education program, and you or the student cannot have had four or more years of education undergraduate previously. The maximum number of times you can apply for this credit is four for the first four years of undergraduate study. Students who have drug convictions on their record are not eligible for the American Opportunities Tax Credit.

There are also income limitations. Your modified adjusted gross income (MAGI) – your adjusted gross income (AGI) with some added tax deductions – cannot exceed $ 80,000 or $ 160,000 for married couples filing jointly. If your income exceeds these thresholds, the credit begins to gradually disappear until single adults earning $ 90,000 or more and married couples jointly reporting earning $ 180,000 or more are no longer eligible for this credit.

Lifetime Learning Credit

The Lifetime Learning Credit has more lenient requirements than the US Opportunities Tax Credit, but it’s worth less – only $ 2,000 at most. You can get a credit of 20% of your eligible educational expenses, up to a maximum of $ 10,000 per year. Again, transportation and room and board don’t count. The Lifetime Learning Credit is non-refundable, so it can reduce your tax bill to zero, but not more. The good news is that there is no limit to the number of years you can apply for the Lifetime Learning Credit, unlike the American Opportunity Tax Credit. You can also claim it for college or professional training costs, even if you are not actively pursuing a degree.

To claim the Lifetime Learning Credit, you must be enrolled in an eligible institution for at least one academic period during the year. This can be a semester, term, or trimester, depending on how your school structures its terms. The income requirements for this credit are lower, so those with higher income may not be able to claim it. Individuals with a MAGI greater than $ 58,000 and married couples filing jointly with a MAGI greater than $ 116,000 will see their Lifetime Learning Credit decrease until they are no longer eligible once their MAGI exceeds $ 68,000 or $ 136,000, respectively.

Which tax credit is right for you?

American Opportunity Tax Credit is the best choice for most people if you or the student in question is in their first four years of undergraduate study. But if you’ve already applied for the American Opportunity Tax Credit for four years, or if you or the student doesn’t qualify due to drug convictions or enrollment in a graduate program, the Lifetime Learning Credit might be your only option.

High income earners may not be able to claim either of these tax credits. However, the qualification requirements change from year to year, so just because you can’t claim it this year doesn’t mean you won’t be able to claim it next year. Always check the tax credit requirements before you apply to make sure you still qualify.

The American Opportunity Tax Credit and the Lifetime Learning Credit can both ease the financial hardships of getting a college degree a bit. Use the information above to decide which one is right for you.

About Andrew Miller

Check Also

Verizon to buy prepaid phone vendor Tracfone for up to $6.9 billion

Estimated reading time: 1-2 minutes This news archive is available for your personal, non-commercial use …