• If the taxpayer paid, or was deemed to have paid, or used loans for qualified expenses for themselves or a dependent to enroll in or attend an eligible educational institution, an education credit may be available.
    • Expenses used for calculating credits must be paid during the tax year.
    • Expenses used for calculating credits must be reduced by any scholarship amount designated for those expenses.
    • If the taxpayer is filing MFS, none of these benefits are allowable.
  • An eligible educational institution is an accredited postsecondary institution.
    • If there is any doubt as to accreditation, check the U.S. Department of Education database at ed.gov/accreditation.
  • The taxpayer can take ONLY ONE credit per student per year: the American Opportunity Credit (AOC) or the Lifetime Learning credit.
    • Note: The American Opportunity Credit is often referred to as the American Opportunity Tax Credit (abbreviated AOTC). For consistency with NTTC training, this manual uses “AOC”.
  • If a taxpayer could be claimed as a dependent but was not, that taxpayer is still eligible for a credit. Situations where it makes financial sense to shift an education credit to a dependent are rare, and mostly involve high-income taxpayers, for example someone paying the Alternative Minimum Tax (AMT), which is, of course, out-of-scope. 
  • Normally the student will have received a Form 1098-T from the educational institution, showing tuition and fees paid, whether the student was at least a half-time student, scholarships and grants.
    • If box 4, “Adjustments made for a prior year”, has an amount in it, the return is out-of-scope if the taxpayer wants to use any of the expenses on the Form 1098-T to claim an educational credit or a deduction on either Schedule A or Schedule C.
    • 1098-T information is entered on Form 8863 - Educational Credit, as described below. That TaxSlayer page is limited to two Form 1098-Ts per student.
      • If a student has three or more 1098-Ts that can be used for a specific educational credit, the return must be completed by hand and paper-filed.
    • If the 1098-T has a dollar amount in box 5, “Scholarships or grants”, see the section Scholarships, Fellowships and Grants – Form 1098-T on page 32 regarding whether this amount is taxable.
      • Note: Quite often, when a scholarship is for a dependent, the best approach is to treat $2000 of that (or the full scholarship, if less than $2000) as taxable income for the dependent and use the related $2000 of expenses to maximize the educational credit for the taxpayer. 

Which Education Benefit is Best?

  • If the student qualifies for the American Opportunity Credit (AOC), in almost all cases it will be the most beneficial credit because
    • It is a partially refundable credit
    • Eligible expenses include course materials as well as tuition and fees.
  • If the student does not qualify for the AOC because they are not a half-time student or previously had four years of college academic credit, then claim the Lifetime Learning Credit unless a Schedule C business-related expense is available and is better.
    • Note: Education expenses over the amounts allowable for either credit may be deductible elsewhere.
  • A systematic process should be used to determine which education credit is best.
    • First complete ALL other aspects of the return. 
    • If the taxpayer had health insurance through the Marketplace, make sure that ACA information (Form 1095-A) is entered.
    • Use one of the listed tools below; if that doesn’t provide a clear answer, then use a manual process.
  • There are tools that can be used to determine the amounts eligible for the two education credits, to help the taxpayer decide which is best:
    • New for tax season 2024: After you complete the Education Credits, Form 8863, information in TaxSlayer, TaxSlayer will show you a comparison screen, with refund (or tax due) amounts for Lifetime Learning, American Opportunity, or no credits!  This is a big help.
    • Pub 4012 tab J provides a comprehensive overview of the various education-related benefits available to taxpayers, and also a comparison of the American Opportunity Credit to the Lifetime Learning Credit.
    • The Education Benefits Calculator, an optimizer, can be found at cotaxaide.org/tools/. 

American Opportunity Credit (AOC)

  • This credit can be claimed if all the following apply:
    • The student had not completed the first four years of postsecondary education (usually but not always the freshman through senior years of college), as determined by the eligible educational institution, by the beginning of the tax year, and has not already claimed this credit four times.
    • The student is enrolled at least half-time in a degree program.
      • Note: If the student completed a four-year program in the first part of the current year, and then enrolled in a masters or PhD program, expenses for that advanced degree during the tax year can be used for the AOC. This is one reason it may be advantageous not to claim AOC for the freshman year that begins in the fall, with only five months of costs to claim.
      • Tip:  If a student had minimal expenses for the tax year, it may be best in the long run to claim Lifetime Learning this year, and save a year of AOC eligibility for a future tax return.
    • Neither the AOC nor its predecessor, the Hope Scholarship Credit, has been claimed (by the taxpayer or anyone else) for this student for any four prior tax years.
      • Note: It may be advantageous to amend a prior return where a lower AOC credit was claimed, to instead claim the Lifetime Learning Credit for that prior year, to make the taxpayer eligible to claim a larger AOC credit in the current (or future) year, assuming all other conditions are met. [From the IRS perspective, there is no limit to how many years back this amendment can be made, because the taxpayer will be paying an additional amount with the amended return, but federal amended returns by Tax-Aide are in scope only for the prior three years.] 
    • The student has not been convicted of a felony drug offense.
  • Regarding those four years:
    • Foreign college-level study is also counted toward the first four years if the eligible education institution counts that study as academic credit.
    • These qualifying first four years don’t have to immediately follow secondary school and don’t have to be continuous; there can be breaks between, as well as quarters or semesters with fewer than maximum academic credits.
  • Allowable expenses are tuition, fees, books, supplies, and (potentially) computers, other hardware, or software.
    • It is the position of the Tax-Aide program that having a computer is needed for students if the student says that a computer is needed, as, for example, to look at homework assignments which are posted only online.
    • Amounts paid by others, such as grandparents, are deemed paid by the taxpayer.
  • The credit is split into refundable and nonrefundable parts.
    • 60% is nonrefundable (to a maximum of $1,500); this goes on Line 3 of Schedule 3.
    • 40% is refundable (to a maximum of $1,000); this goes on Line 29 of Form 1040.
  • When the student is the taxpayer and is less than 24 years old, refer to page J-14 of Pub 4012, which is a set of seven questions to be answered to determine if the refundable part of AOC can be claimed.
    • TaxSlayer asks these questions toward the bottom of the Form 8863 – Educational Credit page, if AOC has been selected. (“Are you eligible for the refundable portion of the American Opportunity Credit? Answer NO if 1, 2, & 3 apply to you:”) If the student is not the taxpayer or spouse, ignore the 1, 2, and 3, and just answer “Yes.” 
      • If the student is the taxpayer or spouse, and questions 1, 2, and 3 do seem to apply, see the full set of questions in Pub 4012 for a final determination of whether to answer “Yes” or “No.”
    • If you reach question 7, and the answer to that question is “... no, you do not qualify...”, then education expenses should probably be used, if possible, for the Lifetime Learning Credit or as an expense or deduction on Schedule C or Schedule A.
  • Tip:  If claiming AOC, it is recommended to document this in a TaxSlayer note (see page 8) named “AOC” which is updated each year.  (Examples: “AOC claimed for Nick in 2020 & 2021” or “AOC claimed 4 years already”.)
  • If the AOC was previously disallowed and the taxpayer is now – appropriately – claiming that credit, go to the Information to Claim Certain Refundable Credits After Disallowance menu page [Deductions > Credits Menu > Claiming Refundable Credits after Disallowance > ...], reachable via the search box by entering 8862, and select “Claim AOTC After Disallowance.”
    • Note: The menu option “Claim AOTC After Disallowance” will only appear if Form 8863 claiming AOC has been added to the return.
    • Note: If the IRS makes a final determination that the AOTC claim was due to reckless or intentional disregard of the rules, the taxpayer is barred from claiming that credit for the following two tax years and shouldn’t file Form 8862 in those years. If the final determination is that fraud was involved, the prohibition is for ten years rather than two; do not file Form 8862 during this ten-year period. 
    • Note: Once a Form 8862 has been filed, it is not necessary to file that form in future years unless a claim for this credit is again reduced or disallowed.

Lifetime Learning Credit

  • This credit is limited to courses that are “either part of a post-secondary degree program or taken by the student to acquire or improve job skills”, per Pub 970.
  • Allowable expenses are normally only tuition and fees. Amounts required to be paid to the institution for course-related books, supplies, and equipment are also allowable, but note that normally such items can be purchased elsewhere.
    • Amounts paid by others, such as grandparents, are deemed paid by the taxpayer.
  • There is a $10,000 limit on costs per return, regardless of the number of students for whom this credit is claimed.

Entering Education Information in TaxSlayer

  • To begin the process of claiming a benefit, go to the Form 8863 - Educational Credit page [Federal Section > Deductions > Credits Menu > Education Credits].
  • Select the name of an eligible student.
  • Select which of the benefits is being claimed, and the dollar amount of qualified expenses for that benefit.
    • Qualified expenses for the two credits are discussed above. Qualified educational expenses paid by a third party may be claimed).
  • When AOC or Lifetime Learning is selected, TaxSlayer will display a box asking for more information about the educational institution.  New:  Institution information is now part of carryforward.
    • Both educational credits require the student to have attended an institution eligible to participate in a student aid program administered by the U.S. Department of Education.
      • Note: Educational expenses related to self-employment, and deductible as an expense on Schedule C, do not have this requirement.
    • Schools that qualify are listed at ope.ed.gov/dapip/.
    • The IRS won’t accept an e-filed return if an EIN was not entered. 
      • TaxSlayer won’t allow entry of an EIN unless at least one of the two questions about a 1098-T is answered “Yes.”
      • If no EIN is entered, TaxSlayer will generate a warning, and the return must be paper filed.
  • The question about whether the Hope credit or AOC has “already been claimed on 4 prior tax returns?” must be  answered “No” if the AOC has been selected at the top of the page [that is the requirement]; if the LLC has been selected, you must answer “Yes” to complete the page.
    • If the question is answered “No”, then answer the next one to three questions.
      • Also, create a note (per page 8) that records the individuals and years for which the American Opportunity credit has been claimed.
  • Click “Continue” to have TaxSlayer calculate how the information you entered affects the tax return.
    • New for tax season 2024:  TaxSlayer now shows a comparison here of how the credits affect the return.
    • Warning: TaxSlayer may determine that the credit selected by the preparer was incorrect – for example, AOC was checked but TaxSlayer decided that the taxpayer wasn’t eligible, and instead awarded the Lifetime Learning Credit. Look at the listing that appears after clicking “Continue” to determine if the expected credit was awarded.
    • For either the AOC or LLC, TaxSlayer creates Form 8863. 
  • Note for CA state returns: CA has no education credits, so education expenses allocated on the federal return for an education credit can be allocated otherwise on the CA return
    • If the taxpayer has a Schedule C on the return, and the educational expenses are related to that business, and the business has a net profit, then follow the procedure in the section Manually Entering Income Differences on CA Schedule CA, page 108, to reduce income on the CA return [the reduction is the lesser of the educational expenses or the net profit].
    • If the taxpayer is itemizing on the CA return and cannot use some or all the expenses on a Schedule C, and the educational expenses are job-related, then – subject to the 2%-of-AGI reduction, the educational expenses can be added to the CA return as an additional itemized deduction.
      • There is no way to directly claim this additional deduction in the State Section of TaxSlayer. Instead, add that amount to Schedule A, as described in the section Schedule A - Unreimbursed Employee Expenses and Miscellaneous Deductions Subject to 2%-of-AGI Reduction (No line on Schedule A) on page 88, so that it will flow from there to CA Schedule CA Part II line 21.

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