During the pandemic, many have gone back to school. But a college education can be costly. Students should take advantage of as many ways to save money as they can. One of the ways nonprofits (nonprofit schools, universities, and other educational facilities) can help their students save money is by claiming education credits on their taxes. When claiming these credits, students need to use Form 8863. This article will further explain what the form entails, who can file this form, and other facts you need to know.
- What is Form 8863?
- Who Can File Form 8863?
- What are Qualified Education Expenses?
- Scholarships, Grants, and School Loans
What is Form 8863?
Many students earning a postsecondary education can receive tax benefits to cover things like tuition, school fees, and other education-related expenses. Form 8863 helps students find and claim the right education credit for their situation. Education credits are based on the amount of the student’s adjusted qualified education expenses. These expenses are covered in detail later in the article.
The two most used credits are the American Opportunity Credit and the Lifetime Learning Credit. Students can only claim one per tax refund, and each credit has different requirements and benefits. Suppose a family has two dependents attending school. In that case, they can claim both the American Opportunity Credit and the Lifetime Learning Credit on their tax forms, but not for the same student.
Nonprofit colleges and other educational institutes can help students by explaining the two different types of credits and finding the best one to save the most money on their tax returns.
1. The American Opportunity Credit
Students who file for the American Opportunity Credit receive the highest return on their taxes. With a maximum credit of up to $2,500 per eligible student, up to forty percent of this credit qualifies as tax payment and could help increase your refund.
There are limits to this credit. Only students who have not completed the first four years of their postsecondary education can file for this credit. Students must be enrolled in a program heading towards a postsecondary degree or educational certificate. Students must also be enrolled in school at least part-time for a minimum of one academic period.
It is crucial to file this form correctly. If not, students can be banned from claiming it for two to ten years. Since students cannot file for this credit after four years of postsecondary education, they could lose this money. If a mistake is made when filing this form, students must attach Form 8862 to their next tax return to correct the problem.
The American Opportunity Credit covers qualified education expenses like tuition, enrollment fees, course materials, and other study materials whether they are bought at the student’s school or not.
2. Lifetime Learning Credit
The Lifetime Learning Credit is less restrictive. All students can file for this credit regardless of whether or not they are enrolled in a program leading to a degree or certificate. Unlike the American Opportunity Credit, this education credit is available for one or more courses and can be used each year of the student’s post-secondary education. Taxpayers can even use this credit for classes taken to improve their job skills.
The Lifetime Learning Credit is nonrefundable. What that means is this credit reduces the taxes owed but does not add to a refund for the year.
Like the American Opportunity Credit, the Lifetime Learning Credit also covers tuition and enrollment fees needed for a students’ education. These fees must be required for enrollment and purchased at the school. The maximum benefit students can receive is $2,000 per return.
Who Can File Form 8863?
Before filing Form 8863, taxpayers must have their school’s Employer Identification Number (EIN) and received Form 1098-T from the institution. Most nonprofit educational institutes must send this form to their students. If your college qualifies for these credits but is not required to send this form, schools can inform students they can still file Form 8863 if they can demonstrate enrollment and provide proof they paid tuition and other related education expenses.
Who receives the education credit can be a matter of confusion. All students who attended an eligible education institution can claim an education credit. Still, the person who receives the credit and refund will differ based on who files the taxes.
The student can file for either of these credits if they file their own taxes, have paid for their own education, or receive school loans and not tax-exempt grants. If a student is still dependent on another person’s taxes, for instance, their parents, their parents can file to receive the education credit. If another person pays for school and other education expenses, the student will get the credit unless they are dependent.
Regardless of who files, there are some limits to who can file Form 8863.
- You cannot claim the American Opportunity Credit if you make more than $90,000 if filing as single or $180,000 if filing jointly.
- The Lifetime Learning Credit cannot be claimed if you make more than $69,000 if filing as single or $138,000 if filing jointly.
- You cannot file if you or your spouse are nonresidents or did not file taxes as a resident alien.
- The American Opportunity Credit cannot be filed if you have been convicted of a felony for possessing or distributing drugs.
What are Qualified Education Expenses?
Education credits are based on the amount of adjusted qualified education expenses paid during the tax year. Once again, this can get a bit confusing because these expenses differ depending on the type of education credit you are filing.
The American Opportunity Credit provides students with the best return. Tuition, required fees, course materials like books, supplies, and all equipment needed to study are covered even if that material is not bought at the school.
The Lifetime Learning Credit will give you less back but still covers tuition, fees, books, supplies, equipment, and materials paid directly to the school if required for enrollment.
You may be surprised at what the education credits do not cover. Non-academic fees and student activity fees only qualify if they must be paid as a condition of enrollment. That means the costs of sports, games, hobbies, and noncredit courses are not included. Additionally, room and board, insurance, medical expenses, and student health fees, transportation, and any other living expenses do not qualify as education expenses for these purposes.
Scholarships, Grants, and School Loans
Form 1098-T does not include the amounts of any scholarships, grants, or school loans. When informing students about their rights and responsibilities, it is best to inform them of this fact. Students are responsible for reducing the credit stated on the form by any tax-free amount received. Student loans do not have to be included because they are not tax-free.
The following are examples of tax-free awards that must be addressed:
- Scholarships or fellowship grants, including Pell grants
- Veterans’ education assistance
- Any other tax-free educational allowance other than gifts or inheritance
Schools can help students determine ways to get the most benefit from these awards.
If students add certain tax-free scholarships or grants to their income and use them only for room and board, they may be able to increase their education credit and reduce the taxes owed. Just because a school applies these grants to tuition and other qualified education expenses does not mean the student must.
Pell Grants, for instance, are awarded to lower-income individuals. Most people simply reduce the qualified expenses by the amount of their Pell grant, but If a student adds the Pell Grant to their income, they could be in for a much larger tax return.
Adding a Pell Grant to a student’s income will likely not increase it enough to change tax brackets, so there will be little effect. Then they can claim these grants on Form 8863 for the full amount and receive a larger refund.
Form 8863 can be a helpful tool when doing taxes. Students can take advantage of education credits and with a well-thought-out plan. Colleges and other educational institutes can help students gain confidence when filing taxes. One way to do this may be to have an accountant to help find these and other ways to increase students’ tax returns and ensure no mistakes are made when filing for educational credits.
Nonprofits looking for more ways to raise funds can find more tips and tricks on our blog. Donorbox provides affordable options for online donation processing and donor management on our website.
Frequently Asked Questions (FAQs)
Here we’ll answer some of the commonly asked questions on filing form 8863.
1. How much can I receive from an education credit?
The American Opportunity Credit is a tax credit up to $2,500 of qualified education expenses. Forty percent of the credit can be refunded. That means students can receive up to $1,000 in tax refunds.
2. Can I file for the American Opportunity Credit and the Lifetime Learning Credit?
Students must choose between the American Opportunity and Lifetime Learning Credit. A parent with two college-age students can file for both credits but not for the same student. The American Opportunity Credit provides more benefits, but the Lifetime Learning Credit can still give students a break from their taxes.
3. What is an eligible educational institution?
Any public, nonprofit, private university, or vocational school is eligible for an education credit. Almost all postsecondary schools qualify as long as they participate in a student aid program through the Department of Education.