Education Tax Credit

Single Moms: You Can get Cash Back by Taking Advantage of This Education Tax Credit

Putting someone – including yourself – through college can put a major dent in your finances. But a very generous tax credit can put a big chunk of change back in your pocket.

The American Opportunity Tax Credit, or AOTC, can chop $2,500 per student off your tax bill. Even better, a pretty big portion of that is refundable – meaning if you don’t owe any taxes, you can get cash back.

There are a few hurdles to clear to qualify for this very beneficial tax credit. Make sure you pay attention to the details.

  1. The student has to be listed on your tax return. It has to be you or your dependent.
  2. You paid “qualified education expenses.” Those include fees, tuition, and required books (even if you buy them off-campus), supplies, and equipment. Room and board, along with some other more general expenses, don’t count.
  3. The student went to an “eligible” school. That includes colleges, universities, trade schools, and any other post-secondary school that’s eligible to participate in a federal student aid program.
  4. The student was enrolled at least half time in a program that leads to a degree or certificate for at least one academic period (one semester, for example) during 2016.
  5. The student had not completed her (or his) fourth year of school by the beginning of the tax year. This credit only covers the first four years the student is in school.
Not sure if the school qualifies? Go to the FAFSA website to make sure it has a Federal School Code.

Here’s how the AOTC works for each student: The tax credit equals 100% of the first $2,000 you pay plus 25% of the next $2,000 you pay, for a total credit of $2,500. If that’s more than your total tax bill, you can get 40% – $1,000 – back in cash… the beauty of a refundable tax credit. 

So if, for example, you are sending both your child and yourself to college, you get two tax credits. Here’s how that looks with numbers.

The Student College Expenses Tax Credit
You $1,500 $1,500
Your Child $8,000 $2,500

Your total AOTC would be $4,000. Your credit is limited to the amount of expenses paid – $1,500. Your child’s expenses qualify for the full credit.

Like other tax credits, these phase out as MAGI (modified adjusted gross income) gets higher. For the AOTC, the credit shrinks if your MAGI hits $80,000 a year, and disappears entirely if your MAGI tops $90,000. 

If your situation doesn’t fit the AOTC mold – the student isn’t taking enough credits, has passed the four-year maximum, or is in graduate school – you may still get a tax benefit through the Lifetime Learning Credit (LLC).

Lower your tax bill with the LLC

If your student doesn’t qualify for the AOTC, they probably still qualify for the less generous but more flexible Lifetime Learning Credit.

The LLC covers 20% of the first $10,000 of qualified tuition expenses, so up to $2,000 maximum non-refundable credit per tax return (not per student, like the AOTC.) The income phase-outs are also different; your credit shrinks at the starting MAGI of $55,000 and disappears for MAGI over $65,000.

Where this credit shines is flexibility – it covers pretty much any higher education you pay for. So if your student is in grad school, taking longer than four years to finish an undergrad degree (which is super common), or is taking classes to help maintain or improve job skills, the LLC has you covered.

To apply for either credit, the AOTC or the LLC, you’ll need to fill out IRS Form 8863. You’ll need to fill out a separate page 2 of the form for each student.

For more information on these beneficial tax credits, check out IRS Publication 970: Tax Benefits for Education.

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