There are two main ways a US taxpayer can save money on their taxes (1) tax deductions and (2) tax credits.

• Tax deductions reduce the amount of income that is subject to federal income tax.
• Tax credits reduce the amount of tax you owe, dollar for dollar.

Subject to certain limits and restrictions, education expenses / fees are eligible for both tax deduction and/or tax credits. On this page, I will discuss two tax credits available for education expenses, namely (1) Lifetime Learning Credit (LLC) and (2) American opportunity tax credit (AOTC).  Stay tuned to this page for updates.  

Lifetime Learning Credit [LLC] Or,

Lifetime Learning Tax Credit (LLTC) 

The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return. [Source: IRS website]

To claim this credit the taxpayer should know following.

• The taxpayer may claim the credit for qualified expenses paid for taxpayer himself, taxpayer’s spouse, taxpayers dependent.
• The taxpayer can claim this credit for undergraduate, graduate, and professional degree courses, and even to postgraduate courses that help improve job skills.
• Qualified expenses include tuition, fees, books, supplies, equipment, and other course materials as long as they are required (room and board are not included)
• The Taxpayer can claim up to $2,000 per year. The maximum limit of this credit is USD 2,000 that is 20% of the first $10,000 of combined post-secondary tuition fees totaling no more than $2,000 (per year, not per student). In other words, this credit is limited to 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return.
• There is no time limit to claim this credit. The taxpayer can credit this credit if (s) he fulfills the conditions.
• For Tax Year 2019, the full credit limit on modified adjusted gross income (MAGI) is $136,000 if Married Filing Jointly; $68,000 if Single, Head of Household, or Qualifying Widow (ER). The taxpayer can’t claim the credit if taxpayer’ MAGI is $68,000 or more ($136,000 or more if you file a joint return).
• This credit is not refundable. The taxpayer can claim this credit to make tax liability to zero.
• Felony drug convictions do not make the student ineligible for the Lifetime Learning Credit.

American Opportunity Tax Credit [AOTC]:

Formally the HOPE credit. The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you. [Source: IRS website]

To claim this credit the taxpayer should know following.

• The taxpayer may claim the credit for education expenses paid for taxpayer, taxpayer’s spouse, or the taxpayer’s dependent (who is considered as an eligible student)
• Each eligible student for which the taxpayer claim the credit must have been enrolled at least half-time for at least one academic period, which began during the 2020 Tax Year when filing in 2021.
• Qualified expenses include tuition, fees, books, supplies, equipment, and other course materials as long as they are required (room and board are not included)
• The taxpayer can claim up to $2,500 per eligible student, per year. The credit covers 100% of the first $2,000 of qualified tuition, required fees, and qualified expenses, plus 25% of the next $2,000.
• The American Opportunity Credit applies only to the first four years of post-secondary school education (university, college, vocational school, nonprofit and for-profit institutions)
• For Tax Year 2020,
  1. For full credit, the taxpayer MAGI modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly).
  2. The taxpayer receives a reduced amount of the credit if MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  3. The taxpayer cannot claim the credit if MAGI is over $90,000 ($180,000 for joint filers).
• The taxpayer can get 40% of the credit as a refund, so the tax taxpayer may receive $1,000 per eligible student as a tax refund even if the taxpayer does not owe tax to the federal government.
• Felony drug convictions do not make the student ineligible for the Lifetime Learning Credit.

Compare Education Credits and Tuition and Fees Deduction [URL]

The taxpayer needs to consider also.

• The taxpayer cannot claim both the Lifetime Learning Credit and the American Opportunity Credit for the same student in the same year, but the taxpayer can claim one credit for one student and the other credit for another student.
• The American Opportunity Credit is generally the more valuable tax credit, but it is only good for the first four years of higher education and has stricter enrollment requirements.
• If the taxpayer qualifies for the Lifetime Learning Credit, the taxpayer can claim it any number of years (but a tighter income restriction). 
• To be able to claim the American Opportunity Tax Credit or the lifetime learning credit (LLC), the taxpayer must have received the Form 1098-T, Tuition Statement, from an eligible educational institution either in the U.S. or [What is an Eligible Educational Institution?]

How to claim the LLC / LLTC?

Fill form 8863. This is a two-page form used for computing educational tax credits and attach to Form 1040 or 1040-SR. This form is applicable to both LLC/LLTC and AOTC.

For NRI (Non-Resident Indian) and filing India tax return should considered section 80(C) of Income Tax Act, 1961. Section 80(C) allows the deduction of INR 150,000 from income [URL]. The taxpayer should know following.

• Eligible Payment: Only tuition fees, no other fees such as (development fees or donation or capitation fees, etc.).
• The eligible payment made for full-time education, including any play school activities, pre-nursery, and nursery classes. The institution can be either private or a government sponsored one.
• Eligible kids: The benefit applies to the fees paid for up to two children. So, if a couple has four children, both can claim tax benefit as both have a separate limit of two children each.
• Who can claim expenses: The parent who makes the payment gets the tax advantage. If both parents are working and pay taxes, both can claim individually up to the amount of fees paid.