Education Tax Credits: What You Need to Know

It’s back-to-school season, so what better time to talk education tax credits? Taxpayers claiming the credits are often flagged by the IRS, usually due to a simple-to-fix form mismatch.

There are two education tax credits that students—and parents of students—can claim: The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The IRS offers a comparison chart of the two here. In short, the AOTC offers up to $2,500 credit per eligible student and is available for up to four years of post-secondary education in pursuit of a degree. In other words, it’s designed to help fund a traditional undergraduate education. The LLC offers up to $2,000 per tax return (not per student), but it applies to a broader range of education and training, including courses to acquire or improve job skills.

Now, here’s where claiming these education tax credits can earn you a closer look by the IRS:

  • The credits are only available for taxpayers with a modified adjusted gross income (MAGI) under $180,000 or $90,000 for single, head of household, or qualifying widow(er).
  • OK, you might think: Can the student claim it themselves? No, not if you’re still claiming them as a dependent on your tax return.
  • You can claim both AOTC and LLC benefits on the same return but not for the same student or the same qualified expenses.
  • If a previous-year claim for the AOTC was disallowed, Form 8862needs to be filed before claiming the credit in future tax years.
  • Also, for the AOTC, the student must attend at least half-time for an entire academic period and be confirmed as an undergraduate.

The most common AOTC trigger happens when the educational institution’s Form 1098-T (Tuition Statement) doesn’t align with the taxpayer’s claim for a reason above or another reason. Sometimes, it’s due to an error by the institution (including the student’s legal name or Social Security Number being wrong), but more often, the taxpayer is claiming credit for expenses that don’t qualify, or they’ve exceeded the four-year allowance.

We’ve even heard about nefarious tax preparers who convince their clients to take the credits when they know they don’t qualify. One such tax preparer was recently prosecuted and is awaiting sentencing in Pennsylvania for aiding and assisting the filing of over $800,000 in false education tax credits.

The tactic might date back to the start of the AOTC around tax year 2010, when as many as 2.1 million taxpayers erroneously claimed $3.2 billion in education tax credits. According to a report by the Treasury Inspector General for Tax Administration, more than 370,900 ineligible individuals earned an estimated $550 million in credits despite not attending classes for the required time or because they were ineligible postgraduate students. Another 63,700 taxpayers received $88.4 million in credits while also being claimed as a dependent or spouse on another person’s tax returns, and even 250 prisoners took advantage of the tax credit and erroneously earned a total of $255,879.

These days, the IRS states that it uses an automated system to flag and select income tax returns for examinations that show incorrect amounts. Your first indication of a problem will be a letter from the IRS stating that, for instance, Form 1098-T verifying the student’s enrollment is missing or additional information is needed to support the amounts of qualified expenses you reported. Copies of paid receipts, canceled checks, or other documents may be required.

What if you’re contributing to a grandchild’s education expenses? Tax-savings opportunities abound in these situations. If you’re contributing to a student’s education who is not your dependent, you cannot take the education tax credits yourself. But here’s the good news: THEY can take it. The IRS allows third-party payments of qualified education expenses to be considered “paid” by the student. So even if your MAGI exceeds the $180,000 (or $90,000) limit, your contribution may still qualify under their adjusted income.

For your tax savings, it’s worth jumping through a few hoops to ensure your education contributions are gift-tax-free. If the money is submitted straight to the college and is for tuition, it will typically fall outside of gift tax restrictions. Feel free to contact us with questions.

Photo from 123rf.com

Client Spotlight

A terrifying home invasion involving men with masks and guns set Pam Wood on an unexpected path to business ownership in 1981….
What happens when you combine a passion for creating, a knack for business, and deep family values? For Scott Klingler, owner of MergeWorks, it resulted…
Bessie M. Irizarry loves embracing a good challenge. It’s one of the many reasons she’s earned respect as a female engineer and business owner in…
San Antonio native Mark Lopez can’t recall a time he didn’t envision himself following the footsteps of his father, a project manager, into the construction…
Siew Pang knows that the key to unlocking the American dream can be discovered by embracing unexpected opportunities….
If you’re a San Antonian, you may not want to imagine your weekend without brunch at the city’s beloved Magnolia Pancake Haus….
Greg Thompson has long respected money and how it can catalyze greater things….
You may not be aware of it, but Don Lasseter has helped you throw a party. How do we know that? He’s the franchise owner…
Land surveyors aren’t known for exceptional customer service. But why shouldn’t they be? David Breaux set out in 1998 to prove that treating customers right…
When Lance Rose sees a business need, he fills it. That’s how he and Terri, his wife of 30 years, have evolved into the proud…
Matt and Lara Bruhn met while in graduate school at Harvard. He served as an officer and F-15C pilot with the U.S. Air Force….
Growing up in Piedras Negras, Coahuila, Mexico—just south of Texas along the Rio Grande—Oscar E. Flores dreamed of becoming a designer….

Blogs and Articles

Digital Assets and Your Taxes

You may have reveled in the Wild West days of cryptocurrency and other digital assets, but we’re entering an era of meticulous record keeping and...

Digital Assets and Your Taxes

Read More

The Goldilocks Rule for Tax Withholding

If you’re like half of Americans this year, you are more dependent on your tax refund to pay for necessities than you have been in...

The Goldilocks Rule for Tax Withholding

Read More

How Inherited Assets Affect Your Taxes

Inheriting assets can be a financial blessing, but it also raises essential tax questions that many heirs overlook. How you manage those assets can have...

How Inherited Assets Affect Your Taxes

Read More

Getting Hit by Someone Else’s Bankruptcy

Finding out that another business or individual who owes your business money has declared bankruptcy can feel like a kick to the stomach....

Getting Hit by Someone Else’s Bankruptcy

Read More

Welcome to Texas: Cutting Tax Ties with Your Previous State

San Antonio is currently one of the fastest-growing metro areas in the nation. If you’re among our new residents, welcome! Before you enjoy the tax-friendly...

Welcome to Texas: Cutting Tax Ties with Your Previous State

Read More

Reaching the Unreachable IRS

Reaching the IRS has always been challenging. With the IRS workforce reduction continuing, many believe your odds of reaching a warm body to resolve a...

Reaching the Unreachable IRS

Read More

How Is Costco Gold Taxed?

Gold, silver, and other precious metals have emerged as standout assets in today’s unpredictable economy due to their ability to remain somewhat independent from stock...

How Is Costco Gold Taxed?

Read More

Yes, You Do Still Have to File Taxes

Early filing numbers are measurably down this year, data security concerns are high, and IRS staffing is in disarray. But if you’re considering scrapping it...

Yes, You Do Still Have to File Taxes

Read More

Retirement Plan Perks for Texas Small Businesses

Retirement Plan Perks for Texas Small Businesses

Read More

Top 6 Worst Social Media Tax Tips

Top 6 Worst Social Media Tax Tips

Read More

What’s Happening with the Corporate Transparency Act?

In March 2025, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule removing the requirement for U.S. companies to report beneficial ownership information...

What’s Happening with the Corporate Transparency Act?

Read More

Love & Marriage & Your Business Assets

Love & Marriage & Your Business Assets

Read More

How Small Business Owners Reduce Taxable Income

How Small Business Owners Reduce Taxable Income

Read More

Spot These Tax Scam Signs Before It’s Too Late

Spot These Tax Scam Signs Before It’s Too Late

Read More

‘Bitcoin Jesus’ Faces Tax Fraud Reckoning

‘Bitcoin Jesus’ Faces Tax Fraud Reckoning

Read More

Now Accepting New Clients

Let’s Start the Conversation

Let’s take a look at your finances together. We offer a complimentary 1-hour call to review your past tax returns. If we see a way to help you, we will.