Here’s something everyone already knows: college isn’t cheap! With approximately 19.9 million students expected to attend American colleges and universities in the fall semester of 2019[i], parents must be thinking about how tuition costs are going to be met. While the largest source of funding comes from loans via financial aid, tax breaks also play a significant role in helping make education more affordable.
There are two primary tax breaks for education expenses: the American Opportunity Tax Credit and the Lifetime Learning Credit. The Tuition and Fees Deduction expired as a result of the Tax Cuts and Jobs Act signed in 2017.
The American Opportunity Tax Credit (AOTC)
The AOTC, formerly known as the Hope Credit, currently provides up to $2,500 of direct tax credits per student to help alleviate the cost of higher education. The first $2,000 of qualified higher education expenses are eligible for 100% reimbursement in credits, and the next $2,000 can generate an additional 25%, for a total of $2,500 in credits for the first $4,000 of education expenses.
The credit is only available for the first four years of a student’s college education, and the student needs to carry at least half of a full course load. In addition, the student needs to be enrolled in a program that leads to a degree or credential.
Income limits apply for those attempting to claim the credit. For 2019, taxpayers filing jointly are phased out when adjusted income is between $160,000 and $180,000. Single taxpayers are phased out of claiming the credit when adjusted income is between $80,000 and $90,000. Taxpayers who don’t pay federal income tax as a result of very low earnings are eligible to receive up to 40% of the credit as a refundable tax credit.
The Lifetime Learning Credit
The Lifetime Learning Credit is worth up to $2,000 per year, crediting 20% of the first $10,000 of qualified higher education expenses. Unlike the AOTC, the Lifetime Learning Credit isn’t restricted by number of years and the student does not need to be pursuing a degree program. Also, there is no full-time course load requirement. The credit can be used even if only one class is being taken.
There are income limitations in place which restrict access to the credit for higher income earners. In 2019, married taxpayers filing jointly are phased out starting at $116,000 and credits are eliminated once adjusted income reaches $136,000. The range for single taxpayers is $58,000-$68,000. Note, the credit is limited to $2,000 per taxpayer per calendar year, while the AOTC is limited on a per student basis.
Putting It All Together
Unfortunately, the tax credits can’t be used for the same expenses in the same year, so you’ll have to evaluate your situation to make the best choice. As a general rule of thumb, the AOTC will give the highest benefit to most taxpayers. As with everything tax and finance related, there are always exceptions, so consult with your Certified Financial Planner Practitioner™ and tax professional to ensure you’re making the best choices.
Tax Year 2019 Education Credits Comparison – IRS chart[ii]
| Criteria | AOTC | LLC |
| Maximum credit or benefit | Up to $2,500 credit per eligible student | Up to $2,000 credit per return |
| Refundable or nonrefundable | 40% of credit | Not refundable |
| Limit on modified adj gross income for married filing jointly | $180,000 | $134,000 |
| Limit on modified adj gross income for single, head of household, or qualifying widow(er) | $90,000 | $67,000 |
| Can you file married filing separately? | No | |
| Dependent status | Cannot claim credit if you are claimed as a dependent on someone else’s return | |
| Must you or your spouse be a U.S. Citizen or Resident Alien? | Yes, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status) | |
| Number of years of post-secondary education available | Only if student hasn’t completed 4 years of post secondary education before 2018 | All years of post secondary education and for courses to acquire or improve job skills |
| Number of tax years credit available | 4 tax years per eligible student including any years former Hope credit claimed | Unlimited |
| Type of program required | Student must be pursuing a degree or other recognized education credential | Student does not need to be pursuing a degree or other recognized education credential |
| Number of courses | Student must be enrolled at least half time for at least one academic period beginning in 2018 | Available for one or more courses |
| Felony drug conviction | No felony drug convictions as of the end of 2018 | Does not apply |
| Qualified expenses | Tuition, required enrollment fees and course materials needed for course of study | Tuition and fees required for enrollment or attendance |
| Whom can you claim the benefit for? | · You · Your spouse · Student you claim as a dependent on your return | · You · Your spouse · Student you claim as a dependent on your return |
| Who must pay the qualified expenses? | · You or your spouse · Student · Third partyˆ | · You or your spouse · Student · Third partyˆ |
[i] https://nces.ed.gov/fastfacts/display.asp?id=372
[ii] https://www.eitc.irs.gov/other-refundable-credits-toolkit/compare-education-credits/compare-education-credits
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.