Lesson 17

Credits - Part 5

Education Credits

Section J

VITA/TCE

TRAINING 101

Disclaimer-- Dear Volunteer,

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This lesson covers a lot of different scenarios when it comes to education credits.

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As an instructor and as a long time VITA volunteer, I want to make sure you have the information you need to prepare accurate and complete returns that give our clients the largest allowable refund.

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There are few things to watch when it comes to Education Credits.

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There is even a possibility to get an education credit even when it was paid for through grants & scholarships.

Please do not get discouraged.

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Take your time and review the information here. You do NOT HAVE TO MEMORIZE anything, but you should be familiar with this topic and know where to look for guidance.

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I have made a handout available to make it easier. I will explain everything, then give you tips of what to watch for.

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Do not get overwhelmed—hang in there.

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It really is not that complicated, it just seems it at first

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Remember—you will be working with a team- & you can refer back to materials like this and PUB 4012

In this presentation we will cover:

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• 1098-T
• Comparison of 2 types of credits
• Qualified Education Expenses
• Who Can Claim the Credit
• Scenarios to Learn By 1 & 2

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Eligibility Requirements

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Two types:

• American Opportunity Credit
• Lifetime Learning Credit

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Both are great credits!

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Only 1 credit per student can be claimed in a tax year.

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Use your PUB 4012 – Section J is all about Education Credits

Education Credits

Form 1098-T

Most students can access the forms by logging in to their account on their school’s website.--Seldom mailed anymore.

Form will be the same for tax year 2026 and 2027

tax year started

tax year

From Tax Year 2023

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AOTC - more than 1 student can earn up to $2,500 in credits on the tax return.

LLC- The maximum credit per tax year is $2,000 regardless of how many students claim it on the tax return.

AOTC

LLC

tax year started

tax year

From Tax Year 2023

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They are both income limited.

Income too high, may not get a credit

tax year started

tax year

From Tax Year 2023

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American Opportunity has both a Non-Refundable & Refundable portion to it ☺

Both are very nice credits.

Lifetime is a Non-Refundable Credit only—which can still help!

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American Opportunity is for Undergraduate Studies.

See 1098-T Box 9

Note-If the student STARTED the tax year as an Under-graduate they still can qualify even if they become a graduate during the tax year.

Lifetime can be for any year of study

Can only use credit 4 times per student.

• Whether claimed by parent, or by student later in life.

Unlimited number of times in life (Lifetime Credit)

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Working towards degree

or certificate

• Working towards Degree/certificate
• Or to Just to Improve Job Skills

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Taxpayer can go to school for any reason ,

but for the IRS to give a credit, there must be a valid reason to go to school:

At least half-time.

Look at Box 8 on the 1098-T

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1 or more course / credit

No felony

drug conviction allowed.

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It’s allowed.

Can claim expenses for books/supplies regardless of where bought.

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Can ONLY claim Books/supplies bought from school.

Can only claim payments made in 2026. It can be for classes in 2026 or Spring 2027.

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Form 1098-T is generally required to claim both credits.

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Most eligible educational institutions should provide a Form 1098-T to students.

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However, if the school was not required to issue a 1098-T, the credit may still be claimed if:

• the school is an eligible educational institution https://ope.ed.gov/dapip/#/home (link on IRS website)

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• and the taxpayer can provide the school's EIN and documentation showing qualified education expenses were paid.

PUB 4012 Tab J

PUB 4012 Tab J

To claim AOTC or LLC:

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• The student must have a valid Social Security Number

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• The taxpayer (and/or spouse, if filing jointly) must also have an SSN (only 1 spouse is required to have SSN)

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• The school’s Employer Identification Number (EIN) must be included on Form 8863 for AOTC

American Opportunity & Life Time Learning Credits

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Remember: American Opportunity is the best credit

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But make sure they qualify for it,

or the client could be faced with penalties and interest and can be banned from claiming in future years.

In case you were wondering how the AOTC is calculated:

100% credit is given for the first $2,000 in expenses $2,000

25% credit is given for up to the second $2,000 + 500

$2,500 max credit

Qualified Education Expenses:

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• Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
• Student activity fees, but only if the fees are a condition of enrollment or attendance.
• Books, supplies, and equipment needed for a course of study. **Make sure to ask the student if they had to buy books and supplies.

Qualified Education Expenses (QEE)

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Personal Expenses NOT Allowed for Credit

Personal Expenses are NOT allowed for Education Credits

• Room/Rent – Dorm/Apartment/Home
• Meal Plans/Food

Students have to live/eat regardless of whether they are in school or not—choosing to live/eat on campus is a choice and cannot be included for the credit.

• Medical
• Parking Passes cannot be claimed– the student can walk, ride a bus or bike, etc. Bringing a car on campus is a personal choice and cannot be claimed as an expense for the credit.

When Scholarships/Grants are Taxable

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Remember: QEE = Qualified Education Expenses

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When Scholarships/Grants are Taxable

Most people do not realize that scholarships and grants received for school could possibly be taxable.

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When are they taxable?

• When scholarships/grants are NOT USED for Qualified Educational Expenses (QEE), they are taxable.

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• Tuition/Books/supplies for school –NOT TAXABLE
• Everything else – TAXABLE including meal plans and dorms, parking pass on campus—those are living/personal expenses not education expenses

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Who Can Claim the Credit

If the Student is a Dependent:

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• And If the parents are claiming the student as a dependent,

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• The parents get to claim the education credit (non-refundable and refundable portion of AOTC)

If the Student is a Dependent:

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• And parents decide they are NOT going to claim the student as a dependent,

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• The parents DO NOT get to claim any education credits

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• The student can only claim non-refundable credits

Scenarios to Learn By: #1 Annie Woodruff-page

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Remember: QEE = Qualified Education Expenses

SEE NOTE

SEE NOTE

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Scenarios to Learn By #1 Annie Woodruff-page 1

Client has a 1098-T

Ask:

• Were you in school working towards a degree/certificate?
• Or ask: What are you going to school for? Studying for?

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• AOTC—must be working towards a degree or certificate.
• Lifetime Learning must be for degree, certificate, or improving job skills.

Taking a class for fun or keeping mind sharp is great, but you can’t get an education credit for it.

20XX

SEE NOTE

SEE NOTE

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Scenarios to Learn By #1 Annie Woodruff-page 2

Notice:

• Did they attend at least half-time? Requirement for AOTC

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• If not, then use Lifetime Learning Credit

20XX

Scenarios to Learn By: #1 Annie Woodruff-page 1

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SEE NOTE

SEE NOTE

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Scenarios to Learn By #1 Annie Woodruff-page 3

Notice: Is Box 9 checked?

• IF CHECKED- ASK: Were you a graduate student before January 1, of tax year? If so, they can’t use AOTC—Use Lifetime instead

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• Note: If they became a graduate DURING THE TAX YEAR– they CAN take the AOTC. Per IRS PUB 970 pg. 18. Example: January they were undergrad, August they were a graduate student.

20XX

SEE NOTE

SEE NOTE

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Ask student: Have you or your parents claimed the AOTC credit for you (the student) at least 4 times?

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This credit is so nice, it can only be used 4 times PER PERSON.

Scenarios to Learn By #1 Annie Woodruff-page 4

20XX

Scenarios to Learn By: #1 Annie Woodruff –page 5

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Meet Annie:

• Annie is 26 years old and is going to school to get a business degree.
• She has only been in college for 1 ½ years. So she couldn’t have taken AOTC 4 times yet.
• She went to school at least half-time.
• She does not have a felony drug conviction
• Annie meets all the qualifications for AOTC.

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• Since Box 5 is blank– everything Annie paid for school (Box 1 Tuition and Fees) and books can be claimed as expenses for an AOTC.

Tip: Since the maximum amount of expenses need to generate the maximum AOTC credit is $4,000, you do not need to enter more than $4,000. You can enter more, but it will not get Annie any more money. In this case she doesn’t need to add in books/supplies as she is already over $4,000.

Scenarios to Learn By: #1 Annie Woodruff-page 6 (END)

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Entering in Taxslayer

Either entry will be fine-credit would be the same

Scenarios to Learn By: #2 Vanessa Rabbit

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Remember: QEE = Qualified Education Expenses

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Scenarios to Learn By: #2 Vanessa Rabbit-page 1

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Meet Vanessa:

• Vanessa is 24 and is studying nursing.
• This is her 3^rd year in college.
• She attended college Full-time during the tax year.
• She does not have a felony drug conviction.
• Vanessa meets the eligibility requirements for AOTC.

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• Box 1 (Tuition) is more than Box 5 (Scholarships/Grants)
• Subtract:

Box 1 $17,500

-Box 5 - 4,500

Difference $13,000 QEE

This means Vanessa paid $13,000 for tuition.

Since all her scholarships went to QEE, she doesn’t need to claim the scholarships as income.

We have more than $4,000 in expenses—you don’t need to add in other expenses. Entering more will get you no more credit.

Scenarios to Learn By: #2 Vanessa Rabbit-page 2 (END)

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Entering in Taxslayer

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This amount is more that $4,000 so there is NO NEED to enter other expenses.

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It won’t change anything.

Scenarios to Learn By: #1 -REVISED-Annie Woodruff-page

Excess Scholarship

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Remember: QEE = Qualified Education Expenses

SEE NOTE

Scenarios to Learn By #1-REVISED-Annie Woodruff-page 1

Revised 1098-T

Now, What is the excess amount?

$12,000

- 6,120

$ 5,880 Excess

- 720

$ 5,160 Excess –Taxable Income – Taxable to Annie

Now the Scholarships & grants is more than the Fees in Box 1.

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What is the excess amount?

$12,000

- 6,120

$ 5,880 Excess Taxable

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We ask Annie if she had other QEE– like books and supplies to reduce the excess amount.

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She spent $720 on books and supplies

SEE NOTE

Scenarios to Learn By #1-REVISED-Annie Woodruff-page 1

Revised 1098-T

Does Annie now have a legal filing requirement?

And, what if I said, it just might be possible for the parents to get an education credit after all?

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Visit Lesson 18 to Learn about Allocation, see you there!

In this REVISED Scenario, the parents would NOT get a tax credit since Annie received more than enough to cover the expenses for school.

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And most tax preparers & others leave it at that, but remember—Annie now has taxable income.

WOO-HOO!!!

You Did it!

Next Up:

Education Credit-

Allocations