Intro to U.S. Income Taxes: Students

Updated: May 20

Taxes are one of the most daunting aspects of adulthood, and there are things to know as students that no one ever teaches you. This is your crash course to how taxes work, what resources are available to assist you, and other helpful things to know when Uncle Sam comes knocking!


Frequently Asked Questions

Q: What is the American Opportunity Credit?

A: The American Opportunity Credit (AOTC) is an education credit that can be used by students within the first 4 years of post-secondary education. This credit can only be taken 4 times (by either an independent student or the parents claiming them), and it is the most advantageous of the education credits.


This credit takes up to $4,000 of qualified education expenses in excess of scholarship, to give you up to $1,500 of nonrefundable credit to offset tax owed and $1,000 of refundable credit that can either offset additional tax owed or be refunded to you directly. You may only take the AOTC once for each taxpayer on a given return.

Q: What is the Lifetime Learning Credit?

A: The Lifetime Learning Credit (LLC) is an education credit that can be used by students after their first 4 years of post-secondary education, and there is no limit on the number of years you can claim this credit. This credit is for qualified education expenses paid to an eligible educational institution, and can help pay for undergraduate, graduate and professional degree courses--including courses to acquire or improve job skills.


This credit takes up to $10,000 of qualified education expenses in excess of scholarship, to give you up to $2,000 of nonrefundable credit to offset tax owed. You may only take the LLC once per tax return, although it can be the sum of a couple's education expenses together. While the LLC cannot be taken in addition to the AOTC for the same taxpayer, a taxpayer and their spouse could each take one on the same return.


Q: How do I determine which education credit I should take?

A: You can compare the different benefits and requirements of the two credits here: https://www.eitc.irs.gov/other-refundable-credits-toolkit/compare-education-credits/compare-education-credits


Q: What is the tuition and fees deduction?

A: The tuition and fees deduction is an above-the-line deduction, meaning you don't have to itemize to take it. This deduction can be used by students who don't qualify for the AOTC or LLC education credits. It allows you to deduct up to $4,000 of tuition and fees expenses paid to an eligible educational institution.


Q: What are qualified education expenses?

A: Qualified education expenses are expenses paid for tuition and required books, fees, and supplies that a student needs for a course of study. These supplies must be required by the college or course (check your syllabus) and be working towards a degree. Qualified education expenses do NOT include rent, insurance, or food expenses paid to the institution.


For the AOTC only, the expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For the LLC and tuition & fees deduction, these expenses must be paid to the eligible educational institution directly.


Q: What is an eligible educational institution?

A: An eligible educational institution is a school offering higher education beyond high school. It is any college, university, trade school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.


Q: Does scholarship always have to offset my qualified education expenses?

A: Any scholarship that exceeds your qualified expenses is considered taxable; this includes scholarship used to pay for university housing.

Additional scholarship may be reclassified as income if it is not required by the university to be used for qualified expenses--doing this to maximize the credit allows you to offset any additional tax owed with the nonrefundable portion, while gaining the benefit of the refundable portion.

IRC Regulation 1.25A-5(c), 2020 IRS Publication 970, "Fact Sheet: Interaction of Pell Grants and Tax Credits: Students May Be Foregoing Tax Benefits by Mistake.”


These calculation sheets can used to determine how much scholarship should be considered taxable in order to maximize your tax benefit:

AOC Calculation Sheet
.xlsx
Download XLSX • 15KB
LLC Calculation Sheet
.xlsx
Download XLSX • 16KB

What else you may need to know about taxes

I. What everyone needs to know

III. What non-citizens need to know

VI. What you need to know about COVID

V. What resources you need to know


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