America Opportunity and Lifetime Learning Credits
The American Opportunity credit is a per student credit that allows a credit of 100% of the
first $2,000 of tuition and fees paid and 25% of the second $2,000 spent. Students must be
attending school more than half time, in a degree or certificate program, in their first four
years of college, university, or trade school and must be free of any felony drug convictions.
The American Opportunity credit is both nonrefundable and refundable so 60% of the credit
can be used to reduce taxes to zero only and any remaining credit from that portion is lost.
The remaining 40% of the credit can be added to refund once the taxes are reduced to zero.
The Lifetime Learning credit is a nonrefundable credit of 20% of the amount paid in tuition
and fees to attend any college or trade school. Students don’t have to be enrolled in a
degree or certificate program, attend half-time, or be in their first four years of school. You
can even use this credit for the costs of graduate courses. The maximum credit of $2,000
covers all eligible students on the tax return. The Lifetime Learning Credit can only be used
to zero taxes with any remaining credit lost.
The education of your children, or even of yourself and your spouse, can be a major investment.
Knowing if your college-age child is still a dependent, what scholarships are taxable, and which tax
credits are available can be confusing. You need to consider your situation to determine which options
are best for you. Tax planning is essential to make the most of these benefits. You should determine
whether your adjusted gross income disqualifies you from using one of the options or whether your
education expenses qualify for the benefit you are considering. The definition of qualified educational
expenses differs between the different tax saving options. You should also consider issues other than
tax, for example, the student's eligibility for financial aid and who has control over the money used for
college. In certain circumstances, it might be better to have the child pay the education expenses rather
than the parent; in other circumstances, it might be better to have the parent pay the education
expenses for the student.
Keep the following in mind when preparing your tax return:
- Scholarships and Grants
- Student Loan Interest Deduction
- Tuition and Fees Deduction
- Coverdell Education Savings Account
- Qualified Tuition Programs
- Higher Education Credits
- Education Savings Bond Program
Whether a student is claimed as a dependent on your tax return may affect your eligibility, or the
student's eligibility, for the different tax benefits available for education expenses.
A student is someone enrolled in school full-time for at least five months out of the calendar year. A full-
time student under age 24 who has a job may still be claimed as a dependent on their parents' return. If
your child must file a return, they cannot claim their own exemption if they qualify as your dependent.
Students are allowed to take the standard deduction even if they are not claiming their own exemption.
The standard deduction amount of a dependent may be lower than the standard deduction of a person
who is not a dependent.
Scholarships and Grants
A candidate for a degree can exclude from income amounts received for tuition, books, and fees.
Amounts used for room and board do not qualify for exclusion.
Amounts received by a scholarship candidate for services such as teaching or research are taxable
income even if providing such services is a required condition for receiving the scholarship or grant.
Scholarship prizes won in a contest are not considered scholarships/fellowships if they are not
designated to be used for educational purposes only. These must be included in gross income.
Payments from the Department of Veterans Affairs are not considered scholarships and are not
included in income.
Scholarship and fellowship payments for teaching, research, or other services paid by the National
Health Services Corps Scholarship Programs or by the Armed Forces Health Professions Scholarship
and Financial Assistance Program are not included in income.
Student Loan Interest Deduction
You may be able to deduct up to $2,500 of interest you paid on a qualified student loan to attend an
accredited, higher educational institution. The loan must have been for you, your spouse, or someone
you claimed as your dependent when you took out the loan. This deduction is an adjustment to income
so you can claim it even if you do not itemize deductions on Schedule A, Itemized Deductions. Your
modified adjusted gross income must be less than $80,000 ($160,000 if Married Filing Jointly). If you
are filing Married Filing Separately, you cannot take this deduction.
Tuition and Fees Deduction
You may be able to deduct up to $4,000 for qualified tuition and fees paid for higher education even if
you do not itemize deductions. Qualified tuition and fees are amounts paid for you, your spouse, or a
person whom you claim as your dependent. The tuition and fees must be required for enrollment or
attendance at an eligible educational institution. You may qualify for the maximum $4,000 tuition and
fees deduction if your modified adjusted gross income is $65,000 or less ($130,000 or less if Married
Filing Jointly) or a reduced tuition and fees deduction of up to $2,000 if your modified adjusted gross
income is greater than $65,000 ($130,000 if Married Filing Jointly) but not more than $80,000
($160,000 if Married Filing Jointly). If your modified adjusted gross income is greater than $80,000
($160,000 if Married Filing Jointly), you cannot take this deduction.
This deduction is not available:
If the American Opportunity Credit or Lifetime Learning Credit is claimed for the student
On returns filed with a Married Filing Separately filing status
To a person who can be claimed as a dependent on another person's return, even if the other person
chooses not to claim the person as a dependent
Qualified expenses used to take the tuition and fees deduction must be reduced by any tax-free
benefits received, such as distribution of earnings from a Qualified Tuition Program (QTP) or tax-free
savings bond interest. Qualified expenses must also be reduced by the full amount of a Coverdell
Education Savings Account (Coverdell ESA) distribution.
For example, Charmaine's modified adjusted gross income is under $65,000. She incurred qualified
tuition expenses of $5,000 for her son, Anwar, who is a student Charmaine claims as her dependent.
Anwar received a $6,000 distribution as the beneficiary of a QTP, of which $500 represents the tax-free
earnings. He also received a $1,000 distribution from a Coverdell ESA. Charmaine's allowable tuition
and fees deduction is $3,500 ($5,000 qualifying expenses less $500 tax-free earnings less $1,000
Coverdell ESA distribution).
Qualified Tuition Program (QTP)
A Qualified Tuition Program (QTP or Section 529 plan) is a program that allows you to prepay a
student's college tuition or contribute to a higher education savings account for payment of qualified
higher education expenses. Qualified expenses include books, supplies, equipment, and room and
board if the student is attending at least half-time. Half-time attendance is defined by the institution.
Plans can be established by a state agency or by a qualified educational institution. You are not
restricted to investing in your state's plan, but contributions to your own state's plan may qualify you for
certain additional tax benefits on your state tax return.
You may make nondeductible contributions to a QTP for yourself or for any other beneficiary,
regardless of your relationship to the beneficiary. There are no age restrictions and no income
restrictions on the individuals contributing to the plan.
Contributions are not tax deductible. The part of a distribution representing the amount contributed to a
QTP is not included in income. Earnings distributed by a QTP are not included in income if the total
distribution is used to pay qualified education expenses. This exclusion from income applies to
distributions from QTPs established and maintained by private colleges and universities. Previously,
only distributions from programs established by a state agency qualified for this exclusion. A 10%
penalty may apply to the taxable part of the distribution.
A QTP is not a custodial account; therefore, the beneficiary is not considered the owner of the account.
The parent, as the account holder, is able to change the designated beneficiary at will. For example, if
the current beneficiary obtains a scholarship and no longer needs the money, the account holder can
assign a new beneficiary. Money remaining in the account after paying for a beneficiary's qualified
expenses can be rolled into another family member's QTP account tax free if certain conditions are met.
Contributions to a QTP are also considered a gift from the contributor to the beneficiary and are
eligible for the annual gift tax exclusion.
You can contribute to both a QTP and a Coverdell education savings account in the same year for the
Higher Education Credits
The following two tax credits are available to taxpayers who pay higher education costs:
The American Opportunity Credit - This is the expanded Hope Credit that is available for 2009 and
The Lifetime Learning Credit
The American Opportunity Credit is a credit of up to $2,500 for the qualified tuition and related
expenses paid for each eligible student. The credit is 100% of the first $2,000 of qualified expenses
plus 25% of the next $2,000 of qualified expenses paid per student. It can be claimed for the first four
years of postsecondary education for each student. The student must be enrolled at least half time in a
qualified program and must not have been convicted of a felony drug offense. Eligible expenses
include tuition, required fees, and the cost of required books and software for courses.
You do not qualify for the credit if your modified adjusted gross income is greater than $90,000, or
$180,000 if married filing jointly.
The American Opportunity Credit is unique in the fact that it combines both a nonrefundable and a
refundable credit in one. The first 40% of the credit up to $1,000 is refundable with the balance of the
credit treated as a nonrefundable credit. This unique feature allows you to receive the refundable
portion of the credit as a refund if you have no remaining taxes.
You may be able to claim a Lifetime Learning Credit of up to $2,000 each year for the total qualified
tuition and related expenses paid during the tax year for all eligible students who are enrolled in eligible
educational institutions. This credit is 20% of the first $10,000 of qualified expenses paid per tax return.
Unlike the American Opportunity Credit, the Lifetime Learning Credit is not based on the student's
workload and is not limited to the first two years of postsecondary education. Expenses for graduate-
level degree work are eligible. You do not qualify for the credit if your income is greater than $60,000
($120,000 if Married Filing Jointly). The Lifetime Learning Credit is a nonrefundable credit, which
means that if your taxes are less than your credit, then you will lose any credit amount left after you
reduce your taxes to zero.
Both of these credits are nonrefundable and may be reduced based on your income. You may claim
the American Opportunity Credit for any of the first four years of a student's postsecondary education
and claim the Lifetime Learning Credit for that same student in later tax years. You can claim the
American Opportunity Credit for one child and the Lifetime Learning Credit for another student in the
same tax year. College students who pay expenses using a Coverdell Education Savings Account
(Coverdell ESA), a Qualified Tuition Program (QTP), or education savings bond funds may also claim
an education credit if the credit is claimed for expenses different from those paid for using the tax-free
distributions from these funds.
You do not qualify for either credit if your filing status is Married Filing Separately. In addition, you
cannot claim either the American Opportunity Credit or the Lifetime Learning Credit for a student in the
same year you are claiming the tuition and fees deduction for that student.
You must claim the student as a dependent to receive either education credit. If you do not claim the
student as a dependent, or if someone else is eligible to claim the student as a dependent but elects
not to, only the student may claim the credit. A student claimed as a dependent on another person's tax
return cannot claim the credit.
Claiming the American Opportunity Credit may be more beneficial than claiming the Lifetime Learning
Credit, if you are eligible for both. Also, claiming one of the education credits is usually more beneficial
than taking the tuition and fees deduction because a credit offsets the tax liability dollar for dollar.
However, if you do not qualify for any of the education credits (for example, because of modified
adjusted gross income restrictions) you may instead decide to take the tuition and fees deduction on
For example, Brad's filing status is Single, and he has wages of $31,000. After allowing for the standard
deduction and personal exemption amount, his tax is $2,834. He is a sophomore in college and paid
$10,000 in qualified tuition expenses during the year as part of a degree program. He has no other
income or deductions. Brad has the choice of taking the American Opportunity Credit, the Lifetime
Learning Credit, or the tuition and fees deduction. He should choose whichever option gives him the
biggest tax savings:
If Brad takes the tuition and fees deduction, which allows a maximum deduction of $4,000, he would
save $600 in taxes ($4,000 x 15% tax bracket).
If Brad takes the Lifetime Learning Credit instead, he would save $2,500 in taxes (the maximum credit
amount) because his income is below the limits. In this scenario, the credit gives you $1,900 more in
savings than the tuition and fees deduction would.
If Brad takes the American Opportunity Credit instead, he would save $1,800 in taxes (the maximum
credit allowed) because his income is below the limits. In this scenario, the credit gives him $1,200 more
in savings than the deduction would.
The maximum allowable American Opportunity Credit is $2,500 per student. The maximum allowable
Lifetime Learning Credit is $2,000 per tax return. In the preceding scenario, if Brad's education
expenses had been $7,000, the American Opportunity Credit would save $1,100 more in taxes than the
Lifetime Learning Credit. The American Opportunity Credit would still be $2,500, but the Lifetime
Learning Credit would only be $1,400 ($7,000 expenses x 20% Lifetime Learning Credit rate).
If your income level disqualifies you from using the Lifetime Learning Credit, you might still be able to
take the American Opportunity Credit or the tuition and fees deduction. In the preceding scenario, had
Brad's income been $62,000, he would not qualify for the Lifetime Learning Credit (the modified
adjusted gross income limit for credit is $60,000 for Single filers). He is still eligible for the American
Opportunity Credit of $2,500. He is also eligible to take a $2,000 tuition and fees deduction and, if he
takes the standard deduction, realize a tax savings of up to $500 ($2,000 x 25% tax bracket).
As shown in these scenarios, it pays to be aware of the different rules.
Education Savings Bond Program
You may exclude interest on qualified U. S. savings bonds from your gross income if you have paid
qualified higher educational expenses during the redemption year. When calculating the amount of
higher education expenses paid during the year, you may include any contribution of the bond
proceeds to a Qualified Tuition Program (QTP) and any contribution to a Coverdell Education Savings
Account (Coverdell ESA) as a qualified expense. You do not qualify for the exclusion if your filing status
is Married Filing Separately or if your modified adjusted gross income is greater than $84,950
($134,900 if Married Filing Jointly) in the year the bond is redeemed.
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