As a college student, you want to save money anywhere you can – and that includes filing your taxes. If you’re not taking advantage of every education tax credit and deduction you’re eligible for, you might wind up paying more than you need to. That means you’re losing out in other areas of your budget.
At Addition Financial, we work with a lot of college students. One of questions we hear most frequently is:
What are the differences between the American Opportunity Tax Credit and the Lifetime Learning Credit – and which one should I take?
That’s a very important question to ask because it can affect your tax filing and refund. In this post, we’ll explain the basic requirements for the credits, and lay out five differences between them.
There are four basic criteria that you must meet to take either education tax credit. Here they are:
Provided that you meet all three criteria, you are eligible to take one of the two education tax credits when you file your tax return.
How do you know which education tax credit to take? Here are the differences between them, so you can determine which credit makes the most sense for you.
The first major difference between the American Opportunity Tax Credit and the Lifetime Learning Tax Credit has to do with the type of education you’re pursuing.
To take the American Opportunity Tax Credit, you must be enrolled in a program in pursuit of a degree or certificate. In other words, if you’re pursuing an undergraduate degree or a professional certification, you may be able to take this credit.
By contrast, the Lifetime Learning Tax Credit is available to students who are enrolled in college classes but not pursuing a degree or certificate. Even if you take only one class during a calendar year, you can qualify for the credit.
The next difference you should know about has to do with the income requirements and caps for the two education tax credits.
For the American Opportunity Tax Credit, your modified adjusted gross income must be $80,000 or less. The cap is $160,000 for married couples filing a joint tax return.
The Lifetime Learning Tax Credit has a lower cap. Your modified adjusted gross income must be $52,000 or less if you file alone, and no more than $104,000 if you’re a married couple filing jointly.
The length of time that you have been a college student also has an impact on which credit you can take.
The American Opportunity Tax Credit is available only to students who have completed fewer than four years of college. In other words, it may be taken for undergraduate students but not for graduate students.
On the other hand, the Lifetime Learning Tax Credit may be taken even if you have accumulated more than four years of college credit. That means you can take advantage of it if you are pursuing a graduate degree like an MBA or JD.
What if you’re a parent with more than one child in college? How does that impact your eligibility for tax credits?
If you have multiple students in college, you can take the American Opportunity Tax Credit for each one. There is no limit on the number of credits you can take provided that the students all meet the other criteria for the credit.
However, even if you have multiple students who qualify, you may only take the Lifetime Learning Tax Credit for one of them.
All tax credits have a cap – a maximum amount you can claim as a credit on your tax return. That’s another key difference between the two education tax credits.
The maximum amount of the American Opportunity Tax Credit is $2,500 per student. As we mentioned above, you can take this credit for more than one student provided they meet the criteria.
The Lifetime Learning Tax Credit maxes out at $2,000. Remember, you may only take this credit for one student per tax year.
Even if you or a dependent can qualify for both education tax credits, you may only take one credit per student per year. The Lifetime Learning Tax Credit is easier to qualify for, while the American Opportunity Tax Credit offers a larger tax break if you qualify.
To learn how Addition Financial’s Aspire Checking Account can help you make the most of your money in college, please click here.