Here are a few facts about the AOTC:

• The credit is worth up to $2,500 per eligible student and is partially refundable — up to $1,000 if your tax is zero.
• It’s available for the first 4 years of postsecondary education (which is education beyond high school, generally meaning college).
• The student must be pursuing a degree or other recognized education credential and be enrolled at least half time for at least one academic period that begins during the tax year.

The AOTC also allows students to claim tuition, required enrollment fees and course materials needed for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance.

For more information regarding the American Opportunity Tax Credit, please review the American Opportunity Tax Credit page on the IRS website.

The Lifetime Learning Credit differs from the AOTC in a few ways:

• It’s entirely nonrefundable. This means the credit reduces your tax and is limited to the amount of tax you owe.
• The maximum credit amount per tax return is $2,000. It doesn’t matter how many eligible students are on your tax return — you can only take up to $2,000.
• This credit is available for all years of postsecondary education and for courses taken to acquire or improve job skills.
• You don’t need to be pursuing a degree or other recognized education credential to claim the credit.

Like the AOTC, the Lifetime Learning Credit allows students to claim the tuition and fees required for enrollment or attendance, including amounts required to be paid to the institution for course-related books, supplies and equipment.

For more information regarding the Lifetime Learning Credit, please review the Lifetime Learning Credit page on the IRS website

You may be able to increase your lifetime learning credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may increase only if the amount of the student’s qualified education expenses minus the total amount of scholarships and fellowship grants is less than $10,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student’s income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren’t qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student includes in income don’t reduce the student’s qualified education expenses available to figure your lifetime learning credit. Thus, including enough scholarship or fellowship grant in the student’s income to report up to $10,000 in qualified education expenses for your lifetime learning credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional lifetime learning credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can’t exceed the amount of the student’s actual nonqualified expenses that are paid in the tax year. This amount may differ from the student’s living expenses estimated by the student’s school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn’t prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable income and may be required to file a tax return. But this allows payments made in cash, by check, by credit or debit card, or with borrowed funds such as a student loan to be applied to qualified education expenses.

Parents or students claiming either credit should receive a Form 1098-T, Tuition Statement, from their educational institution. You should make sure it is complete and correct.

Check out Publication 970, Tax Benefits for Education, and Form 8863, Education Credits (Hope and Lifetime Learning Credits), to learn more.

The IRS is now accepting Form 8863, Education Credits.