To encourage people to advance their educational level, job skills, or both, the Internal Revenue Service (IRS) has two tax credits, the Lifetime Learning Credit and the American Opportunity Credit, that may help reduce the cost of education. Both of these credits are explained in detail in the IRS Publication 970(PDF).
What is the difference between a tax credit and a tax deduction? A tax credit directly reduces the total tax you pay where a tax deduction reduces the amount of your income that is taxable.
With the Lifetime Learning Credit, you do not get to claim the educational expenses you’ve paid for your entire life, but you can claim, over your lifetime, up to $2,000 worth of credits for qualifying educational expenses if you are an eligible student or if you claim an eligible student as a dependent for that tax year. Taking coursework to improve job skills also qualifies, so you don’t have to be taking courses to earn a degree.
What is a qualifying education expense? College tuition and certain related expenses necessary for enrollment in a course from an eligible educational institution qualify. Check the 2016-2017 Federal School Code List to see if your school qualifies and the IRS Publication 970(PDF) for a list of qualified education expenses.
There is no limit to the number of years you can claim a tax credit for qualifying educational expenditures with the Lifetime Learning Credit, BUT once you have reached $2,000 worth of credits, you can claim no more. This means, for example, if you have $500 of qualifying educational expenses you paid in each of four years, at the end of the fourth year you would have claimed your limit of $2,000. If you paid more than $2,000 in any one year, your tax credit would be limited to $2,000 total, regardless of whether you paid more in qualifying educational expenses. You will not get a credit for more than $2,000 in your lifetime.
What is the difference between the American Opportunity Credit and the Lifetime Learning Credit? To use the American Opportunity Credit the person must be enrolled in a degree granting program, taking courses towards a degree. In any year when you have yourself, a spouse, a dependent child or children who qualify, you can receive credit for each in that tax year, as long as each have qualifying education expenses. Additionally, you can claim the American Opportunity Credit for one child and the Lifetime Learning Credit for another child in the same tax year. You may not, however, claim both credits for the same child in a tax year. Another difference is that the American Opportunity Credit can only be claimed for four years. After that, if an individual still qualifies for the Lifetime Learning Credit there is no limit to the number of years it can be claimed, up to the lifetime limit of $2,000. If you have a choice of either credit to claim, the American Opportunity Credit will always be greater.
