Sounds like a dream, right? Pay for that degree, and have the tuition bill cover the tax bill as well?
The truth is, any taxpayer – or any dependants claimed on their tax return – who receives a tuition statement from an eligible higher education institution (1098-T), may be eligible for either of two education credits. That is, as long as the disqualifying income threshold isn’t crossed.
As with all credits, the amount you receive reduces your tax bill as a dollar-for-dollar payment, leaving you to pay only that which wasn’t covered by credits, or a larger refund than you expected.
So how do you qualify for these credits? I’m glad you asked.
There are two options for education credits: American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC).
The more advantageous one, AOTC, allows you to claim up to $2,500 per eligible student off your bill. This is because the first $2,000 + 25% of the next $2,000 of qualified education expenses (tuition and enrollment fess, as well as necessary books and supplies), even if it was paid in December to cover the spring semester of the next tax year, is covered under this credit. Additionally, in the event the taxpayer owes nothing in taxes, up to 40% of this credit is refundable. Since the AOTC is much more generous than the LLC, its eligibility rules are tighter as well: the student must be pursuing an undergraduate degree, have not completed 4 years of post secondary education, have not already claimed this credit or its previous version for 4 tax years, be enrolled at least half-time for at least one academic period, and have no felony drug convictions. Any student who does not qualify for the AOTC may nonetheless cash in on the LLC, where, up to 20% of $10,000 paid in higher education costs (just tuition and enrollment fees) may be claimed per tax return.
Here is a great chart that summarizes all of the eligibility rules and information on each credit.