Who Gets the Education Tax Credit: Parent, Student, or Relative?
Higher education can be an expensive endeavor, so finding ways to return some of that money to your pocket can help you cut costs. One way you might qualify involves education tax credits.
Provided by the U.S. government, an education tax credit offsets the costs associated with higher education. These credits can also reduce the amount of tax owed or trigger a refund if the credits exceed what you owe, depending on the type of credit.
Depending on your eligibility, you might be able to claim an education credit on your tax return, reducing the amount of tax you owe by up to $2,500 per tax return. The two education credits that are available are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
What Are the AOTC and LLC?
The AOTC, which is only available to undergraduate students who have not completed the first four years of post-secondary education, has a maximum credit of $2,500 for qualifying educational expenses paid during a tax year. This translates to 100% of the first $2,000 of expenses and 25% of the next $2,000. Also, up to 25%, or $1,000, of the AOTC is refundable, so if you do not have a tax liability, you can claim the credit.
The LLC, which does not have a limit on the number of years you can claim it, has a maximum credit of up to $2,000 for qualifying educational expenses paid during the tax year when the student enrolls. To determine the non-refundable credit, calculate 20% up to $1,000 of qualified education expenses per return.
What Are the Differences Between AOTC and LLC?
Although both the AOTC and LLC offer education tax credits, they do have several key differences:
- AOTC is available for the first four years of higher education.
- LLC is available for undergraduate, graduate, and vocational expenses.
- AOTC has 40% of the credit refundable for the AOTC up to $1,000 per student.
- LLC is not refundable.
- AOTC has a maximum credit amount of $2,500 per student.
- LLC has a maximum credit amount of $2,000 per tax return.
What Expenses Qualify for Educational Tax Credit?
Qualified expenses such as tuition, enrollment fees, books, supplies, and equipment, including a learning tablet, qualify. However, personal living expenses for the student, including medical expenses, food, transportation, and health insurance, do not. To determine what expenses qualify, check IRS Publication 970.
What Happens If the Student Receives a Scholarship or Grant?
Sometimes a scholarship or grant impacts claiming the AOTC or LLC. The student can choose to allocate the funds toward room and board instead of tuition. Since several scenarios exist as to how to allocate those funds, consider reaching out to a CPA or qualified tax preparer for additional information. You can also consult Savant’s Tax Preparation and Advisory Services for personalized guidance on how this may affect your eligibility.
Who Gets the Education Tax Credit?
When you help a student pay for qualified education expenses, some confusion may exist regarding who is eligible to claim the education credit. Although the IRS rules can be complicated, the answer is relatively straightforward if the student attends an eligible educational institution and follows these two rules:
- The IRS only allows you to claim the education credit if you claim the student as a dependent on your tax return. Therefore, if the parents claim the student as a dependent on the parents’ tax return, then the parents are the only ones eligible for the education credit. This is true regardless of who actually paid the expenses.
- If nobody claims the student as a dependent on someone else’s tax return, then the student is the only one eligible for the education credit. This is true regardless of who actually paid the expenses.
If relatives or friends pay for the student’s qualified education expenses, the only time they would be eligible to claim the education credit on their own tax return is if they claim the student as a dependent.
Also, note that you cannot claim the education credit if any of these apply to you:
- Someone else, including parents, claims you as a dependent on a tax return.
- You file your taxes married filing separately.
- You already claimed another higher credit benefit with the same student or expenses.
- You or your spouse were a non-resident alien during any part of the year and did not choose resident alien status for tax purposes.
What Are Some Examples?
To claim the full amount, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). If your MAGI is over $80,000 but less than $90,000 or $160,000 but less than $180,000 for married filing jointly, you will receive reduced credits.
Example 1: Grandparents paid the student’s education expenses, and the parents claimed the child on their tax return.
The parents are the only ones eligible for the education credit. Even if the grandparents paid the student’s expenses directly to the school, the IRS treats the grandparents as making a gift to the parents and then the parents paying the tuition.
- The grandparents are not eligible to claim the education credit because they are not claiming the student as a dependent on their tax return.
- The student is not eligible to claim the education credit because someone else claims the student as a dependent on the tax return.
Example 2: Parents paid the student’s college tuition, and no one else claims the student on a tax return.
The student is eligible for the education credit on his or her tax return (as if the student paid his or her own tuition – if the student can prove they provided more than 50% of his/her own support). The parents are not eligible to claim the education credit because they are not claiming the student as a dependent on their tax return.
Education Tax Credit Resources
Note that you cannot claim the AOTC and LLC during the same year for the same student, so it is best to err on the side of caution when claiming either. However, if you do qualify for both credits, consider applying for the AOTC since it is worth more and you can only claim it during the first four years of higher education. To claim the tax credit, complete IRS Form 8863.
To learn more about either credit, visit irs.gov or consult a tax professional. Your Savant financial advisor can also guide you through education-related tax strategies, including savings plans and student loan interest deductions. For a more personalized approach, consider exploring Savant’s Tax Preparation and Advisory Services. Taking the time to understand your options now could lead to meaningful savings down the road.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
Donald D. Duncan
Managing Partner / Financial Advisor
CFP®, CFA®, CPA/PFS, CSEP, MBA