The American Opportunity Tax Credit (AOC) is a tax credit that lowers the cost of acquiring an undergraduate degree in each of the four years that's typically required to earn an undergraduate degree. The taxpayer who funds the degree receives a maximum annual credit of $2,500 per eligible student. If you have no earned income and thus owe no tax, the person who pays the educational expenses may receive a refund equal to 40 percent of the maximum credit, or $1,000. The AOC credit is subject to taxpayer income limitations.
As a graduate student, you aren't eligible to receive the AOC as it relates specifically to an undergraduate college degree. You may be eligible, however, to receive the Lifetime Learning Credit.
What Is the Lifetime Learning Credit?
When a parent or student claims the Lifetime Learning Credit (LLC), that taxpayer lowers her tax bill by as much as $2,000 or 20 percent of the first $10,000 of school tuition and fees (per the IRS). Eligible fees exclude living and transportation expenses.
Eligible students enrolled in courses at an eligible college, university, vocational school or other postsecondary institution (including courses to acquire or improve job skills) can claim the Lifetime Learning Credit. There is no limit on the number of years the student can claim the credit.
Taxpayers Eligible to Claim LLC
According to the IRS, the purpose of the LLC is to grant financial relief to the student or parent who finances undergraduate, graduate and professional degree courses – including those needed to acquire or improve job skills. That taxpayer can claim the tax credit any year in which the student takes a course to enhance her skills.
For a student's parent(s) to claim the credit, the student must be listed on the parent's tax return as a dependent. The taxpayer can claim the American Opportunity Tax Credit as well as the Lifetime Learning Credit, but not in the same tax year.
Amount of Life Learning Credit Claimed
The dollar amount of the LLC tax credit that a taxpayer can claim is limited by her modified adjusted gross income (MAGI). To qualify for the entire tax credit of $2,000, the single filer's MAGI must be under $59,000 or less in 2021. In turn, the income of the paying parents who file taxes jointly must be $118,000 or less to claim the entire credit.
If the MAGI of the single filer is more than $59,000 but less than $69,000, the tax credit the taxpayer can claim is reduced. The same is true for parents who file jointly and earn more than $118,000 but less than $138,000. The LLC tax credit is not available to those whose income exceeds $135,000. Instead of phasing out at income levels starting at $59,000 for single filers or $118,000 for joint filers, the phaseout begins at $80,000 for single filers and $160,000 for joint filers.
Effect of the Lifetime Learning Credit
The Lifetime Learning Credit reduces the tax liability for the taxpayer who funds the education or training. For instance, if the tax payer owes $5,000 in taxes for 2021 and receives the maximum $2,000 credit, that person's payment to the IRS will be only $3,000, or $5,000 tax liability minus $2,000 tax credit. To qualify for the Lifetime Learning Credit, the taxpayer must have earned income and owe taxes.
Education Tax Forms
In January of the tax filing year, a student's university or training school will send the qualifying party a Form 1098-T. This form is a tuition statement that documents the education expenses the taxpayer funded for the year. You use the information reported on the form to claim the tax credits.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.