Strategies for claiming AOTC and LLC education tax credits

Education Tax Credits

Education tax credits can provide valuable savings, but determining whether a client qualifies for the American opportunity tax credit (AOTC) or lifetime learning credit (LLC) requires careful attention to the rules.

The following top questions highlight practical issues tax pros should understand to help clients claim allowable education credits, avoid reporting errors and identify planning opportunities.

How many credits do you need to qualify?

Each credit has different requirements that must be met for a taxpayer to claim the credit for themselves or their qualified dependent. Half-time enrollment is an AOTC requirement; the LLC has no minimum enrollment requirement and is available for as little as one course.

Q: What is the minimum number of credit hours required to be considered half-time?

A: For federal education tax credits, half-time means at least half of the school’s full-time workload. At most colleges, half-time enrollment is six credits per semester, though this varies by institution. Look at box 8 of Form 1098-T, Tuition Statement. The school checks that box if the student is at least a half-time student.

Q: Does coursework to qualify for a professional designation, such as an EA or CFP, qualify for the LLC?

A: It may. The LLC can apply to coursework taken at an eligible educational institution to acquire or improve job skills, even if the student is not pursuing a degree or other recognized education credential. Coursework for a professional designation may qualify if the provider is an eligible educational institution and the other LLC requirements are met.

Q: If a student drops out midsemester and does not receive Form 1098-T, can the taxpayer still claim an education credit?

A: Possibly. First determine whether the institution was required to furnish Form 1098-T and ask the student to request it if it should have been issued. If an exception applies, a taxpayer who otherwise qualifies may claim the credit without the form if the taxpayer can substantiate the student’s enrollment at an eligible educational institution and payment of qualified expenses. Ask whether the student received a refund and check the institution’s online portal for account information.

Using other funds to pay for education

Some taxpayers might have more than one way to pay their tuition. The funds they use can affect whether they can claim an education credit.

Q: If expenses are paid with §529 plan distributions, can they still be counted for an education credit?

A: No. The same expenses cannot be used for both a tax-free §529 plan distribution and an education credit. If the distribution is treated as tax-free, the qualified expenses available for the credit must be reduced accordingly. A taxpayer may choose not to apply the full distribution against qualified expenses, but that choice may make part of the distribution taxable.

For example:

• Tuition = $10,000

• §529 plan distribution used tax-free = $10,000

• Amount left for the credit = $0

Planning tip: Only $4,000 of qualified expenses is needed to generate the full AOTC. Allocating $4,000 to the AOTC and the remaining $6,000 to the §529 plan distribution may maximize the combined tax benefit. Consider the taxable portion of the distribution when comparing the available outcomes.

Q: Are qualified education expenses reduced if an employer reimburses the expense?

A: Yes. If the reimbursement is part of an employer-provided educational assistance program that is excludable from income under §127, qualified education expenses are reduced by the amount of the reimbursement.

Q: Can a student report $4,000 of an otherwise tax-free scholarship as taxable income so the parents can claim that $4,000 for the AOTC?

A: Possibly. A student may include otherwise tax-free scholarship funds in income when the scholarship’s terms permit their use for nonqualified expenses. This can free tuition expenses for the AOTC. Determine how much of the scholarship can be treated as taxable and compare the student’s resulting tax with the parents’ potential credit before using this strategy.

Claiming the credits in more than one year

With a little planning, taxpayers could claim an education credit in more than one year.

Q: If a student graduates high school in 2023 and follows a normal four-year schedule, can the AOTC be claimed for only four tax years, 2023 through 2026, and then the LLC be used for 2027?

A: Yes, if the student is otherwise eligible each year. The AOTC is limited to four tax years per student, not four academic years. The student must also not have completed the first four years of postsecondary education as of the beginning of the tax year. The LLC could be used in 2027 if the taxpayer and student qualify.

Q: How can you verify whether the AOTC has already been claimed for a student for four years?

A: Review prior-year returns for Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Review Part III for each student and count the years the AOTC was claimed. If prior-year returns are not available, request tax return transcripts and review the education credits reported.

AOTC and LLC eligibility hinges on specific facts, including enrollment status, the type of institution, prior-year claims and how expenses were funded. A quick double-check against Form 1098-T and the client’s prior returns before filing can prevent a costly disallowance later.

Strategies for claiming AOTC and LLC education tax credits

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NATP Staff