Education Credits can be found on Form 8863. These credits include the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit(AOTC). The Lifetime Learning Credit is non-refundable and only reduces the amount of income tax you pay. The American Opportunity credit is partially refundable. We'll discuss each below.
The Lifetime Learning Credit is available for an unlimited number of years for any eligible student paying qualified education expenses. The LLC is available for those pursuing higher education, even a vocational school. An eligible person is you, your spouse or dependent claimed on your tax return. The maximum non-refundable credit is $2000 based on qualified expenses paid and is no longer available for married couples whose Modified AGI is $130,000 and $65,000 for all other filing statuses. The eligible student does not need to be pursuing a degree. Qualified expenses are tuition and fees required for enrollment or attendance. All amounts must have been paid either by you or a third party (student loan) that pays directly to the school during the tax year. These include fees that are paid for the first three months of the following tax year.
The American Opportunity Tax Credit is only available to students pursuing a degree or other recognized education credential, students enrolled at least part time for one academic semester and not have finished the first four years of higher education. The AOTC is both non-refundable and refundable. The first $2000 spent on qualified expenses is credited at 100% and the next $2000 at 25% for a max non-refundable credit of $2500. Again, the non-refundable portion only pays toward any income tax owed. If this portion pays your tax down to $0, that is when the refundable portion kicks in. The refundable portion is 40% of the remaining amount of eligible expenses paid up, to a maximum of $1000.
That sums up both of the educations credits available to taxpayers, of course there are some other nuances but you can check out all the details here if you're really interested. These credits are extremely valuable especially to parents with more than one child pursuing higher education.
Next week we'll be discussing something for all you business owners: Self-employment tax and effective ways to reduce your liability.