Everything You Need to Know About Student Tax Credits


College is very costly. Many students are overwhelmed by the financial requirements. Some struggle to make it to graduation. Luckily, there are many excellent options out there designed to help college students pay for their tuition. One of these options is a student tax credit.

College is very costly. Many students are overwhelmed by the financial requirements. Some struggle to make it to graduation. Luckily, there are many excellent options out there designed to help college students pay for their tuition. One of these options is a student tax credit.

Student tax credits are a type of education-related tax credit. Students enrolled in higher education can use these credits to ease the financial burden of attending. Unfortunately, many students struggle to understand how to apply for students. Others don’t even know what student tax credits are.

In this in-depth guide, we’re going to break down what student tax credits are and how to apply. We’ll also break down a few frequently asked questions that often surround the conversation of student tax credits.

What is a Student Tax Credit?

A student tax credit is a dedicated credit issued by the IRS to assist students with tuition. Currently, there are two major student tax credits available. These include the American Opportunity Credit and the Lifetime Learning Credit. Generally, tax credits are considered to be better than, say, tax deductions. Tax credits will reduce an individual’s overall tax bill down to a dollar. Tax deductions will only significantly reduce one’s total taxable income.

Some taxpayers worry about potential changes to higher education tax credits. However, according to an IRS FAQ page, the two main student tax credits are still going strong.

“The Protecting Americans Against Tax Hikes (PATH) Act of 2015 made AOTC permanent,” the FAQ reads, “ The AOTC helps defray the cost of higher education expenses for tuition, certain fees, and course materials for four years. In addition, the Trade Preferences Extension Act 2015 requires most students to have received a Form 1098-T. To be eligible to claim the AOTC or the LLC, this law requires a taxpayer (or a dependent) to have received Form 1098-T, Tuition Statement, from an eligible educational institution.”

The American Opportunity Credit

The American Opportunity Credit or AOTC is a student tax credit. It can be used by students during their initial four years of college. Applicants are able to receive a yearly credit of $2,400 if eligible. If this tax credit reduces a student’s tax payment to zero, they can then enjoy up to 40% of the remaining amount as a refund.

To be eligible for an American Opportunity Credit, one must meet these requirements:

  • You must pursue a degree at an eligible educational institution.
  • You must be enrolled at least half time (or six total credits per semester in most cases) at the start of the tax year.
  • You must still be in the first four years of school at the start of the tax year.
  • You must have no felony drug convictions by the end of the tax year.

Fast Facts About The American Opportunity Credit

There are a few important things to know about the American Opportunity Credit:

The maximum yearly credit one can receive is $2,500.

  • You cannot claim the American Opportunity Credit for more than four years.
  • You must have a valid taxpayer identification number before you can claim the credit.
  • Your MAGI must be under $80,000 for single filers.

Pros and Cons of The American Opportunity Credit

Pros of The American Opportunity Credit

  • $2,500 can put a serious dent in the amount of money you must pay towards tuition. Even at expensive private universities.
  • Even though a lot of documentation is required, it is quite easy to apply for this student tax credit.

Cons of The American Opportunity Credit

  • Claiming the credit can be tricky. It’s very important to ensure that you qualify before claiming the AOTC. Applicants must also keep copies of documents that are used to determine eligibility. Luckily, tax preparers at ATAX can take on this task for you. If you are audited by the IRS, you may have to pay back the amount you received from the AOTC. This is especially so if you lack sufficient documentation during the application process. You may also be banned from claiming the AOTC in the future as well. Play it safe and work with a tax preparer!

How to Claim an American Opportunity Credit

To pursue this credit, you must receive Form 1098-T (Tuition Statement) from your school. In most cases, students receive this form from their schools by the end of January each year. This statement is actually quite helpful. It helps students understand their credit a little better. It will also show how much you have received during the taxable year. Keep in mind that the amount listed on your 1098-T may not be the complete amount that you can claim. Once you receive your statement, take a look at the list of qualified education expenses via Form 970 from the IRS.

Income Limits for the American Opportunity Credit

In order to claim the total credit, you must have a modified adjusted gross income of $80,000 or less. For students who are married and file their taxes jointly, this MAGI must be $160,000 or less. In most cases, one’s MAGI is simply their adjusted gross income or AGI. A number of factors calculated by Form 1040 play into this number, including your earned income and scholarship money.

The Lifetime Learning Credit

The Lifetime Learning Credit or LLC is a student tax credit. It must be used for tuition and other college-related expenses. This credit is ideal for students who need help paying for professional degrees. The Lifetime Learning Credit can be applied for more than four years. This is a big difference from the American Opportunity Credit. For students pursuing a Ph.D. or Master’s degree, this credit can really be helpful. The total amount of credit received caps at $2,000 per annual tax return.

To be eligible for a Lifetime Learning Credit, one must meet the following requirements:

  • You must be paying for qualified education expenses with this credit. This can include tuition, books, and school supplies.
  • You must be attending an eligible educational institution. (More on that later.)
  • The credit claimer must be the student who is attending school.

Fast Facts About The Lifetime Learning Credit

There are a few important things to know about the Lifetime Learning Credit:

  • You can receive up to $2,000 in credit per year.
  • The IRS has a tool available to see if you qualify for the Lifetime Learning Credit before applying.
  • You must be currently enrolled at an educational institution. (Once you graduate, you no longer can claim the credit.)
  • You must be taking courses to obtain a degree or qualified credential. You can claim this credit if you want to improve your current job skills.
  • You must be enrolled for a minimum of one academic period at the start of the tax year.

Pros and Cons of The Lifetime Learning Credit

Pros of The Lifetime Learning Credit

  • It can be used for more than four years.
  • It’s easy to find out if you are eligible.

Cons of The Lifetime Learning Credit

  • $2,000 is quite a bit less than the $2,500 offered by the American Opportunity Credit.
  • You cannot receive a refund from this credit.

How to Claim a Lifetime Learning Credit

The process is more or less the same as the American Opportunity Credit. You must have a Form 1098-T Tuition Statement. You must also fill out Form 8863 and attach it to Form 1040.

Income Limits for the Lifetime Learning Credit

If your MAGI is between $60,000 and $69,000, the amount you can receive from this credit can significantly reduce. If your MAGI is above $69,000, you are no longer eligible for the Lifetime Learning Credit.

Should You Choose the American Opportunity Credit or the Lifetime Learning Credit?

It would be wise to apply for both! Both credits have their own benefits and downsides. There is nothing prohibiting students from applying for both credits. Just ensure that you meet the eligibility requirements.

Frequently Asked Questions About Education and Student Tax Credits

What would be considered an eligible educational institution?

This is a good question. It’s also one that should be considered before a student begins attending a certain school or college. Eligible educational institutions are schools that offer higher education outside of high school. An eligible educational institution is any school that is included in student financial aid programs. These programs are designated by the Department of Education. Most accredited public or private post-secondary schools are eligible educational institutions.

If you’re not sure if the school you plan on attending is an eligible education institution, you have two options. You can contact your school’s admissions office to find out. Alternatively, you can search for your school’s code via the Federal Student Aid eligible institution lookup tool.

Are there other tax benefits available through the IRS, other than the above-mentioned tax credits?

Yes! There are quite a few alternatives to student tax credits that you can choose from if you are unable to apply for credits. There are about four other options available from the IRS.

A Coverdell Education Savings Account can be used to set aside up to $2,000 per year for education expenses. 

Qualified tuition programs are another popular option. These plans are created by schools or individual states and allow students to prepay or save to pay tuition expenses. Once a student is in school and begins to withdraw cash from the account, that money will not be taxed.

Student loan interest deductions are another possibility. These deductions apply to any loan (even non-FAFSA loans) that is used to pay for tuition. The max deduction for this program is $2,5000 per year.

Lastly, investment retirement accounts (IRAs) can also be used to withdraw money to pay for college. While the money will be subject to federal income tax, you will not be subject to the typical early withdrawal penalty attached to such accounts.

Do I have to pay taxes for scholarship money?

There is no cut-and-dry answer to this question. It all depends on how that scholarship money is spent. In most cases, scholarship payouts are untaxed if the funds go towards qualified expenses. If a scholarship does not meet the requirements for these qualified expenses, individuals may have to pay federal taxes on part or all of the scholarship funds received.

In a write-up for Charles Schwab, senior vice president Carrie Schwab-Pomerantz broke down the basics of identifying if your scholarship money is taxed. To put it simply, it all comes down to how that money is used

“For a scholarship to be completely tax-free, all the money must be used for qualified expenses,” said Schwab-Pomerantz, “For example, if your daughter received a $10,000 scholarship and tuition was $15,000, she wouldn't owe taxes on the money. However, if her scholarship was $20,000 and $5,000 went for room and board, that $5,000 would be considered taxable income. Now let’s say your daughter is a grad student with a fellowship that requires her to be a teaching assistant. In this case, the tax rules are different. That's because scholarship or fellowship money that represents compensation is taxable—regardless of how the money is used. So even if a $20,000 teaching assistant fellowship went primarily to pay for tuition and books, that $20,000 would still be considered taxable income. The student would receive a W-2 from the school and would have to file a tax return.”

To put it simply, you won’t have to worry about taxes if your scholarship covers tuition and books.

Is an earned income tax credit better than an education credit?

Both of these credits are helpful and not necessarily mutually exclusive. The earned income tax credit was created to help students with low incomes or dependants. Your eligibility depends on your filing status. It also depends on how many children or dependents you have upon entering college. 

According to, individuals who earn a low or middle income can benefit from the earned income tax credit.

“If you earn a low to moderate-income, the Earned Income Tax Credit (EITC) can help you by reducing the amount of tax you owe,” the FAQ reads, “To qualify, you must meet certain requirements and file a tax return. Even if you do not owe any tax or are not required to file, you still must file a return to be eligible. If EITC reduces your tax to less than zero, you may get a refund. Educational tax benefits can help with a variety of expenses, including tuition for college, elementary, and secondary school.”

The IRS has a useful tool for determining earned income tax credit as well.

ATAX is the Best Solution for Students Filing Their Taxes

Student tax credits need to be mentioned in end-of-year tax filings. If you’re feeling a bit overwhelmed, don’t worry. The team at ATAX is here to help.

ATAX provides tax preparation and business services to students and non-students alike. We’ll help you with your personal taxes, bookkeeping, payroll, business taxes, and incorporations.

Ready to finish your U.S. taxes quickly? Give us a call today if you haven’t filed your taxes yet. Our team is ready to provide you with professional, efficient, and service-oriented tax preparation.

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