To determine which expenses qualify for an education credit, it is essential to distinguish between the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), as each has specific requirements and limitations.
American Opportunity Tax Credit (AOTC):
- Qualified Tuition and Related Expenses:
- Tuition and fees required for enrollment or attendance at an eligible educational institution.
- Books, supplies, and equipment needed for a course of study, regardless of whether they are purchased from the educational institution.
- Student activity fees, but only if the fees must be paid to the institution as a condition of enrollment or attendance.
- Does not include expenses for room and board, insurance, medical expenses, transportation, or personal, living, or family expenses.
- Does not include expenses for courses involving sports, games, or hobbies unless they are part of the student's degree program.
- Eligible Educational Institution:
- An institution described in section 481 of the Higher Education Act of 1965 and eligible to participate in a program under title IV of such Act.
Lifetime Learning Credit (LLC):
- Qualified Tuition and Related Expenses:
- Tuition and fees required for enrollment or attendance at an eligible educational institution.
- Student activity fees and expenses for course-related books, supplies, and equipment, but only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
- Does not include expenses for room and board, insurance, medical expenses, transportation, or personal, living, or family expenses.
- Does not include expenses for courses involving sports, games, or hobbies unless the course is taken to acquire or improve job skills.
- Eligible Educational Institution:
- Similar to the AOTC, it must be an institution described in section 481 of the Higher Education Act of 1965 and eligible to participate in a program under title IV of such Act.
General Rules for Both Credits:
- Qualified education expenses must be paid by the taxpayer during the taxable year.
- Expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student.
- Qualified education expenses paid by a student who is claimed as a dependent on a tax return are treated as paid by the taxpayer claiming the student as a dependent.
- Prepayments for an academic period beginning in the first three months of the following year can be used to figure the education credit for the year in which the payment was made.
Exclusions:
- Expenses related to any course of instruction or education involving sports, games, or hobbies, or any noncredit course, unless the course is part of the student's degree program or, in the case of the LLC, taken to acquire or improve job skills.
- Student activity fees, athletic fees, insurance expenses, and other nonacademic fees unless required for enrollment or attendance.
- Costs of room and board, insurance premiums, medical expenses, transportation expenses, and other personal, living, or family expenses.
In summary, qualified expenses for education credits primarily include tuition, fees, and necessary course materials required for enrollment or attendance at an eligible educational institution, with specific exclusions for nonacademic and personal expenses.
Sources:
Publication 970 (2023)
Notice 97-73, 1997-51 IRB 1
Instructions for Form 8863 (2023)
Publication 1966
§ 25A. American Opportunity and Lifetime Learning credits
