What You Need to Know About Education Tax Credits
If you or someone included on your tax return are pursuing higher education, we encourage you to consider two little-known tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), two tax breaks that can reduce the amount of tax you owe.
Education Tax Credits: What You Need to Know
The purpose of the AOTC and the LLC is to help with the cost of higher education by lowering the amount of tax you owe.
Regardless of the differences between these credits (we’ll touch on that later), three conditions must be met in order to qualify for any of them:
- You, your dependent, or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse, or a dependent you list on your tax return.
On the other hand, you CANNOT claim these credits if someone else (such as your parents) lists you on their tax return; if your filing status is married filing separately; if you already claimed or deducted another higher education benefit using the same student or same expenses; or if you or your spouse were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes.
Differences Between AOTC and LLC
One of the most relevant differences between these two credits is that the AOTC, applies only when the student hasn’t completed four years of post-secondary education before 2021. Plus, the student must be pursuing a degree or other recognized education credential and must have no felony drug convictions as of the end of 2021.
By contrast, it’s possible to qualify for the LLC with all years of post-secondary education and for courses to acquire or improve job skills. Additionally, the student does not need to be pursuing a degree or other recognized education credential. Finally, the requirement of no felony drug convictions does not apply in this case.
Another important difference is that the AOTC is a partially refundable tax credit (40%), while the LLC is not refundable. This distinction is worth keeping in mind because not refundable tax credits cannot be used to increase your tax refund or to create a tax refund when you don’t have one.
If you are interested in learning more about education tax credits, contact us today. We’ll be glad to help you make sense of these tax breaks and determine if you qualify for any of them.
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Do you need assistance with personal or business taxes? JT Tax Services is here to help! We give you the peace of mind that comes with knowing that you are limiting your liability while staying compliant with all regulations.
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