What is the Education Credit (Form 8863)?
The federal tax code includes three different programs that can reduce the taxes you owe by allowing a deduction, a non-refundable credit or in some cases, a tax credit that is partially refundable.
The term ‘Education Credit’ generally refers to one of the two programs that provide tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Form 8863 is used to figure and claim both the AOTC and the LLC, if you qualify. These valuable credits are available for taxpayers who paid qualified education expenses for themselves, their spouse and/or one or more dependents. Each program has specific rules regarding the costs that are considered qualified education expenses, as well as when and how you can claim each credit.
The remaining program that offers tax benefits for higher education costs is the Tuition and Fees Deduction, which allows qualified taxpayers to deduct certain education expenses from their taxable income. (This deduction must be claimed using Form 8917, not Form 8863.)
Important: You cannot claim education credits or deductions for expenses that were covered by tax-free grants or scholarships.
Also note that although you may qualify for more than one of these tax benefits, you cannot claim multiple benefits for the same expenses. However, you can claim a different tax benefit for different expenses.
For example, if education expenses you paid for your dependent son can qualify for the AOTC but expenses for your dependent daughter do not, you can still claim the LLC or the Tuition and Fees Deduction for your daughter’s expenses, if they qualify, while claiming the AOTC for your son’s qualified education expenses.
In general, tax credits are more valuable than tax deductions, since the credits directly reduce the amount of tax owed. Because the AOTC is partially refundable, this credit is usually the most valuable option for those who qualify, and the LLC is the next best choice if you qualify to claim it. However, in some situations it may be more advantageous to claim the deduction.
Consult a qualified tax advisor if you are unsure which education credit or deduction you should select. You can also access an IRS tool to help you determine which education credits and deductions you qualify for, if any, or review Publication 970, Tax Benefits for Education.
Who can take the Education Credit?
To be eligible for either of the two federal educations tax credits, you must have paid qualified higher education expenses to an eligible educational institution for yourself, your spouse and/or your dependent. If you paid tuition or other expenses to pay for higher education for yourself, your spouse or a tax dependent during the tax year, you may be eligible to claim one of two federal education tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
These two credits can be very effective in offsetting the cost of higher education. (Both are available only for post-secondary education expenses, not the costs of elementary or high school.) You must use Form 8863 to claim either the AOTC or the LLC.
Any qualified educational institution that you or your spouse or dependent attend is required to issue Form 1098-T to you, showing the amount of qualified educational expenses you paid. The educational institution will also file Form 1098-T with the IRS. If you claim the education credit, you should make sure that the amount reported on Form 1098-T agrees with the qualified expenses you are claiming on Form 8863.
Neither credit is available to you if you are:
- Married filing separately
- Listed as a dependent on someone else’s return
- Claiming the credit based on expenses for which you have claimed a different tax benefit
- A non-resident alien for part of the year and you did not opt to be treated for tax purposes as a resident alien (or if this is true for your spouse)
Though they have a lot in common, the AOTC and the LLC are quite different. Each has specific rules around who qualifies, the credit’s maximum value and the specific costs that are considered qualified expenses for the purpose of the credit.
You can compare the details for each credit (and decide which one is most beneficial for your situation if you qualify for both) by visiting the IRS’s Education Benefits Comparison web page. The IRS also offers an interactive tool to help you determine whether you qualify for any education-related tax benefits.
If you paid higher education expenses and you cannot or do not wish to claim either the AOTC or the LLC, you may be able to take the Tuition and Fees deduction. This deduction is a separate tax savings opportunity that offers tax benefits for higher education by providing eligible taxpayers with a deduction from taxable income instead of a credit against taxes owed. You must use Form 8917 to claim the Tuition and Fees Deduction.
Sending your kids to private school? If so, check out this information from e-file.com, https://www.e-file.com/faq/private-school-tax-breaks.php
Important: You cannot claim more than one of these tax benefits for the same qualified expenses, but you can claim different benefits for different expenses on the same tax return, if you wish.