Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 30

Education Credits

A taxpayer may be eligible for an education credit for certain costs of higher (postsecondary) education. There are two education credits: the American Opportunity Tax Credit and the Lifetime Learning Credit.

The American Opportunity Tax Credit applies to the first four years of higher education and is capped at $2,500 per year. However, 40% of the credit can be refundable, which means that a taxpayer can receive a refund even if the available credit exceeds the tax liability. The credit is phased out at higher income levels based on filing status.

The Lifetime Learning Credit is capped at $2,000 per year. Unlike the American Opportunity Tax Credit, which applies to the first four years of higher education only, the Lifetime Learning Credit may be claimed for any level of higher education. However, no part of this credit is refundable. The credit is phased out at higher income levels that are indexed to inflation and based on filing status.

Education credits are coordinated with other education-related tax benefits to ensure that a taxpayer cannot claim a double benefit with respect to the same expenses.

Qualified education expenses may be paid in cash, by credit card, or with the use of borrowed funds (i.e., student loans).

TIP: A taxpayer whose modified adjusted gross income (MAGI) is too high to claim the credit for the qualified education expenses ...