All About IRS Form 8863

Taking higher education classes, whether in pursuit of a degree or to acquire additional professional skills, is something the government wants to encourage. To that end, the IRS offers tax credits for post-secondary education expenses. Two of those credits, the American Opportunity Credit and the Lifetime Learning Credit, can be claimed on IRS Form 8863.

Form 8863 Basics

For those who decide to increase their human capital by enrolling in post-secondary education courses, there are two targeted tax credits: the American Opportunity Credit (AOC), part of which may be refundable, and the Lifetime Learning Credit (LLC), which is not refundable.

Need a refresher on what refundable means? All tax credits provide a dollar-for-dollar reduction in your tax bill but only some are refundable. Say your tax liability is $300. If you’re eligible for a $500 non-refundable credit, that credit will wipe out your $300 liability but NOT increase your tax refund. If you’re eligible for a $500 refundable credit, the credit will wipe out your $300 liability and increase your refund by $200 (500-300=200).

Both the AOC and the LLC are for people with “qualified education expenses paid to an eligible postsecondary educational institution,” in the words of the IRS. Those expenses include tuition and required enrollment fees. In the case of the AOC, “course materials that the student needs for a course of study” are also eligible expenses. You can claim both the AOC and the LLC on the same return in the same year, but not for the same student.

American Opportunity Credit vs. Lifetime Learning Credit

The American Opportunity Credit provides up to $2,500 in tax credit value per eligible student. Up to 40% of that credit may be refundable. The maximum modified adjusted gross income (MAGI) for claiming the AOC is $180,000 if your filing status is married filing jointly, or $90,000 if your filing status is single, head of household, or qualifying widow(er). If your status is married filing separately, you can’t claim the AOC.

The expenses for which you claim the AOC must be for a student who hasn’t finished the first four years of post-secondary education. To claim the AOC, the student in question “must be pursuing a program leading to a degree or other recognized education credential.” An example would be a newly matriculated college student or someone who went to college for two years, took a break to work and is now going back to school to try to finish a four-year degree.

Someone who already has a BA and wants to take a few classes to acquire more skills is not eligible for the AOC and should give the LLC a try. The AOC is only available for four years per student and to qualify for the AOC a student must be enrolled at least half time for at least one academic period (semester, quarter, trimester or whatever your school uses) beginning during the relevant tax year, or in the first three months of the year in which you’re paying the taxes. The LLC, on the other hand, can be claimed for an unlimited number of years and for any number of classes.

The LLC provides a tax credit of up to $2,000 per return, not per student. None of those credit dollars are refundable. Though the LLC is a smaller credit than the AOC, it has the advantage of being more flexible. It can be used for education spending that is not done in pursuit of a degree. Per IRS rules, the LLC is “available for all years of postsecondary education and for courses to acquire or improve job skills.”

As we mentioned, there’s no time limit on the LLC – you can use it every year of your taxpaying life if you meet the requirements. You’re not required to be enrolled at least half-time to claim the LLC. You can use the LLC for a single coding class you take in the evenings on top of your job, for example. The maximum MAGI for claiming the LLC is $130,000 if your filing status is married filing jointly, or $65,000 if your filing status is single, head of household, or qualifying widow(er). You can’t claim the LLC if your filing status is married filing separately.

How to Fill out Form 8863

Strange as it may sound, to fill out Form 8863 you’ll want to start with Part III. That’s the section where you’ll provide information about each student for whom you’re claiming a tax credit, whether that person is your dependent, your spouse or you. In Part III you’ll provide the name and Social Security of the student and the name and address of the educational institution. You’ll also answer questions about the student’s enrollment and whether the student received Form 1098-T from the educational institution at which he or she is enrolled.

Once you’ve followed the directions to fill out Part III of Form 8863 you’ll be ready to fill out Part I if you’re claiming the AOC or Part II if you’re claiming the LLC. If you’re claiming both (which you can only do for two different students), fill out both sections. For both sections, you’ll need to enter information from your 1040, 1040A, or 1040EZ so that the IRS knows your income and can adjust your credit accordingly.

Bottom Line

Though the credits on Form 8863 are modest compared to the amount that most Americans spend on higher education, they’re certainly better than nothing. It’s also not the only education-related tax break – the Student Loan Interest Deduction and the Tuition and Fees Deduction are other options available to qualified households with education expenses.

 

Amelia Josephson smartasset