Tax and Education Credits 2021

Taxpayers who have to write big checks for higher education can see tax savings when filing tax returns next year. If you, your spouse, or your dependents are taking postsecondary coursework, there’s a strong chance a tax benefit may be in your future.

The credits available are the American Opportunity Tax Credit and the Lifetime Learning Credit (AOTC and LLC).

Here are the major points of the AOTC:

  • It’s worth a maximum benefit of up to $2,500 per eligible student.
  • It only applies for the first four years at an eligible college or vocational school.
  • It’s intended for students pursuing a degree or other recognized educational credential.
  • It’s partially refundable. You can receive 40% of the credit’s value, which may mean that you can get up to $1,000 back.

And here’s what you need to know about the Lifetime Learning Credit:

  • It’s worth a maximum benefit of up to $2,000 per tax return per year, no matter how many students qualify.
  • It’s available for all years of postsecondary education and for courses to acquire or improve job skills.
  • It’s available for an unlimited number of tax years.
  • It isn’t refundable.

Qualified expenses for the AOTC include tuition, required enrollment fees, and course materials needed for the course of study, whereas for the LLC, the only qualified expenses are tuition and fees for enrollment or attendance. Qualified expenses can be paid for by you, your spouse, the student, or a third party such as a relative or friend.

What is the story on deductions?

Before 2017, the IRS offered a tuition and fees tax deduction. That deduction has expired, but you can claim it for a relevant year by filing an amended return. You can deduct up to $4,000 from your gross income for money spent on eligible education expenses, including tuition, fees, books, supplies, and other purchases your school requires. Personal expenses like transportation and room and board don’t qualify.

The Tuition and Fees Deduction can’t be claimed in the same tax year that the AOTC or the LLC is claimed for the same student. While the TFD reduces adjusted gross income, the AOTC generally provides a greater tax benefit for most individuals. As the IRS notes, “You can claim all three benefits on the same return but not for the same student or the same qualified expenses.”

This is just a summary of complex provisions. Be sure to contact us to find out how to maximize the benefits for your situation.