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IRS Highlights Credits for Higher Education

While most things have been getting more expensive lately—gasoline, food, rent, you name it—higher education has been pricey for a long time.

But because an advanced degree or some other specialized job training is vital to the career plans of many people, two education tax credits have been put in place to dull the impact of higher education costs: the American opportunity tax credit and the lifetime learning credit.

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These credits are available to qualified taxpayers when they file their tax year 2021 returns now. Tax benefits could be available not only for the qualified taxpayer, but also for their spouses or dependents.

Either credit can be brought into play by filing Form 8863, Education Credits, with a 2021 tax return.

How do the credits work?

Both the American opportunity tax credit and the lifetime learning credit reduce the amount of tax the qualifying taxpayer owes. If their tax is reduced to less than zero, the taxpayer might even get a refund, depending on the credit they claim.

Generally, a taxpayer has to have a Form 1098-T from an eligible educational institution to claim either of the two credits, although there are some exceptions.

The American opportunity tax credit is worth a maximum of up to $2,500 for each eligible student. The credit is best for students pursuing their first four years of college at an eligible college or vocational school. Qualifying students are working toward a degree or some other recognized education credential.

This credit is partially refundable, in that taxpayers could get as much as $1,000 back for each eligible student.

The lifetime learning credit is oriented more toward those seeking a postgraduate degree or to improve job skills. This credit is worth up to $2,000 per tax return per year, no matter how many qualified students the taxpayer may have.

The credit is open to all years of postsecondary education and job skills training.

The lifetime learning credit is available to qualified taxpayers for an unlimited number of years.

The Interactive Tax Assistant tool on the IRS website can be used to determine which credit is best for any taxpayer.

Additional information can be found on IRS.gov on the Compare Education Credits webpage, and in Publication 970, Tax Benefits for Education.

Source: IRS Tax Tip 2022-38

Story provided by TaxingSubjects.com