Education Credits (AOC & LLC)

The tax code offers two education credits to help taxpayers offset the cost of higher education: the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). Both are claimed on Form 8863 and can significantly reduce a taxpayer's tax liability. Understanding when to use each credit—and when a taxpayer qualifies for neither—is critical for EA exam success.

Overview: Two Credits, Different Purposes

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American Opportunity Credit (AOC)

The AOC is the more generous of the two credits for undergraduate students in their first four years of college. It was made permanent by the PATH Act of 2015.

Credit Calculation

The AOC equals 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000, for a maximum of $2,500 per eligible student.

Formula: AOC = $2,000 + (25% x next $2,000) = $2,500 maximum

Refundable Portion: 40% of the AOC (up to $1,000) is refundable, meaning it can be received as a refund even if the taxpayer owes no tax. The remaining 60% is nonrefundable and can only reduce tax liability to zero.

Example: A taxpayer calculates an AOC of $2,500 but only owes $1,200 in tax. The nonrefundable portion ($1,500) reduces tax to zero, leaving $300 unused. The refundable portion ($1,000) is received as a refund. Total benefit: $2,200.

AOC Eligibility Requirements

To claim the AOC, the student must meet all of the following requirements:

1. First 4 Years Only: The student has not completed the first four years of postsecondary education at the beginning of the tax year

2. At Least Half-Time Enrollment: The student is enrolled at least half-time for at least one academic period during the tax year

3. Pursuing a Degree: The student is enrolled in a program leading to a degree, certificate, or other recognized credential

4. No Prior AOC Claims: The AOC has not been claimed for this student for more than 4 tax years

5. No Felony Drug Conviction: The student has not been convicted of a felony drug offense as of the end of the tax year

6. Not Claimed Elsewhere: The student is not claimed as a dependent on someone else's return (unless that person claims the credit)

Qualified Expenses for AOC

For the AOC, qualified education expenses include:

• Tuition and fees required for enrollment or attendance
• Course-related books, supplies, and equipment needed for a course of study (even if not purchased from the school)

NOT Qualified for AOC:

• Room and board
• Insurance
• Medical expenses
• Transportation
• Personal, living, or family expenses
• Sports, games, or hobbies (unless required)

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Lifetime Learning Credit (LLC)

The LLC is more flexible than the AOC and can benefit a wider range of students, including graduate students, part-time students, and those taking courses to improve job skills.

Credit Calculation

The LLC equals 20% of the first $10,000 of qualified education expenses, for a maximum of $2,000 per tax return (not per student).

Formula: LLC = 20% x (qualified expenses up to $10,000) = $2,000 maximum

Important: Unlike the AOC, the LLC is a per-return limit, not per-student. If you have three students in graduate school, the maximum LLC is still $2,000 total, not $6,000.

LLC Eligibility Requirements

The LLC has more flexible requirements:

1. Any Level of Education: Undergraduate, graduate, or professional degree courses qualify

2. Job Skills Courses: Courses to acquire or improve job skills also qualify, even if not part of a degree program

3. No Enrollment Minimum: Can be less than half-time or even a single course

4. Unlimited Years: No limit on the number of years you can claim the LLC

5. Felony Drug Conviction: Does NOT disqualify the student

6. Per-Return Limit: Only one LLC per tax return, regardless of number of students

Qualified Expenses for LLC

For the LLC, qualified education expenses include:

• Tuition and fees required for enrollment or attendance at an eligible educational institution
• Books, supplies, and equipment ONLY if required to be purchased from the institution as a condition of enrollment

Key Difference: For the LLC, books and supplies must be purchased directly from the school as a condition of enrollment. For the AOC, they can be purchased anywhere.

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2024 MAGI Phase-Out Rules

Both credits use the same MAGI phase-out thresholds for 2024:

Calculating the Reduced Credit: When MAGI falls within the phase-out range, the credit is reduced proportionally.

Phase-Out Formula: Credit x [(Phase-out ceiling - MAGI) / Phase-out range]

Example: Single filer with MAGI of $85,000 claiming maximum $2,500 AOC:

• Phase-out ceiling: $90,000
• MAGI: $85,000
• Phase-out range: $10,000 ($90,000 - $80,000)
• Calculation: $2,500 x [($90,000 - $85,000) / $10,000] = $2,500 x 0.50 = $1,250 credit

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Form 1098-T and Form 8863

Form 1098-T: Tuition Statement

Educational institutions issue Form 1098-T to students by January 31. Key boxes include:

• Box 1: Payments received for qualified tuition and related expenses
• Box 4: Adjustments made for a prior year
• Box 5: Scholarships or grants
• Box 7: Checked if amounts in Box 1 include payments for an academic period beginning January-March of the following year

Important: The Form 1098-T amount may not equal the claimable amount. Taxpayers must calculate actual qualified expenses paid, subtracting scholarships and grants from Box 5.

Form 8863: Education Credits

Form 8863 is used to claim both the AOC and LLC. It has three parts:

• Part I: Refundable American Opportunity Credit calculation
• Part II: Nonrefundable education credits
• Part III: Student and educational institution information (completed for each student)

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Coordination with 529 Plans and Other Tax Benefits

The "No Double-Dipping" Rule

Taxpayers cannot use the same expenses for multiple tax benefits. Expenses paid with tax-free 529 plan distributions cannot also be used to claim education credits.

Strategy for Maximizing Benefits: Many advisors recommend paying at least $4,000 out-of-pocket (to maximize the AOC) and using 529 funds for additional expenses like room and board.

Example:

• Total college costs: $25,000 (tuition $15,000, room/board $10,000)
• Pay $4,000 tuition out-of-pocket (claim $2,500 AOC)
• Use 529 funds for remaining $11,000 tuition + $10,000 room/board

Other Coordination Rules

• Cannot claim education credits and the tuition and fees deduction for the same student (Note: The tuition and fees deduction expired after 2020)
• Student loan interest used to pay education expenses can still qualify for the credit
• Employer-provided educational assistance (up to $5,250 tax-free) reduces qualified expenses

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Which Credit Should You Choose?

Since you cannot claim both credits for the same student in the same year, choosing the right credit is important:

Choose AOC when:

• Student is in first 4 years of undergraduate study
• Student is enrolled at least half-time
• Taxpayer's MAGI is within limits
• The refundable portion is valuable (low tax liability)

Choose LLC when:

• Student is in 5th+ year or graduate school
• Student is taking individual courses for job skills
• Student is less than half-time
• Student has a felony drug conviction
• Multiple students on one return (can combine expenses)

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EA Exam Tips

High-Yield Topics for the Exam:

1. Know the numbers: $2,500 max AOC (40% refundable = $1,000), $2,000 max LLC (nonrefundable)

2. Per-student vs. per-return: AOC is per student, LLC is per return

3. Phase-out thresholds: Same for both credits in 2024 ($80K-$90K single, $160K-$180K MFJ)

4. MFS = No credits: Married filing separately cannot claim either credit

5. 4-year limit: AOC only for first 4 years; LLC unlimited

6. Enrollment requirements: AOC requires at least half-time; LLC has no minimum

7. Qualified expenses differ: AOC allows books purchased anywhere; LLC requires books purchased from institution

8. Felony drug rule: Only applies to AOC, not LLC

9. Form 8863: Used to claim both credits

10. No double-dipping: Cannot use same expenses for 529 benefits AND education credits