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College Tax Credit: What You Need and How They Work

Ladder Up understands how the lives of our clients affect their taxes. Clients who have returned to school, started college themselves, or have a child who recently started college may be eligible for certain education tax credits and deductions that can reduce their tax liability. While most education tax credits are taken by parents, certain students who file their own tax returns, and are not claimed as dependents on anyone else’s return, may also claim these credits on their return. Below is a summary of the most significant education tax credits and deductions.

The American Opportunity Credit (AOTC)
The AOTC is one of two credits available to clients who took college courses during the tax year; a client can take one or the other. The maximum AOTC annual credit is $2,500 per student and may be used toward required course materials (books, supplies and equipment), as well as tuition and fees. If the credit brings the amount of tax you owe to zero, up to 40% ($1,000) may be treated as a refundable credit. This credit is only available for expenses incurred by students who are in their first four years of higher education

The Lifetime Learning Credit (LLC)
The LLC is the other available credit. The maximum LLC annual credit is $2,000. Unlike the AOTC, there is no limit on the number of years of higher education for which the LLC may be claimed. As a result, the LLC can be particularly helpful in reducing costs for graduate students, or students who are taking post-secondary courses, but not pursuing a degree.

Student Loan Interest Deduction
While not a tax credit, clients who have made payments toward student loans can also benefit from the student loan interest deduction. Clients can deduct up to $2,500 of interest on student loans through the end of the 2022 tax year.

What to Bring
Eligible educational institutions are required to file and send Form 1098-T for each student with eligible expenses. Clients should bring a copy of the Form 1098-T to claim this credit. Ladder Up will help you determine which credit is best to claim.

Clients who paid more than $600 in student loan interest will receive Form 1098-E at tax time and should bring this form to claim a student loan interest deduction.