Example – How to Determine Whether You Can Claim American Opportunity Credit or Lifetime Learning Credit

American opportunity credit and lifetime learning credit are the two education credits available on 2016 federal income tax return that help you to offset the costs of higher education by reducing the amount of your income tax. According to IRS Publication 970, you are eligible to claim these two credits if you are an eligible student or you paid qualified education expenses for an eligible student who is your dependent for whom you claim an exemption on your tax return. The example below helps you to determine if you can claim American opportunity credit or lifetime learning credit.

Example: John is a 20-year-old full-time college student and single in 2016. His only income is $10,000 wage from his summer job in 2016. His expenses in 2016 include $40,000 tuition, $10,000 rent and $6,000 food plus $2,000 clothing and $2,000 travel expense. John’s parents paid $20,000 tuition, his grandparents paid $10,000 for him and he paid $10,000 by himself. the adjusted gross income (AGI) of John’s parents is $200,000. The AGI of John’s grandparents is $70,000. They want to know who can claim the American opportunity credit or lifetime learning credit.

Step 1: Go through the tests listed on Table 4 or Table 5 of How to determine if you are a dependent to figure out if John is a dependent of his parents or grandparents.

Since John meets all 5 tests on Table 4, he can be a qualifying child of his parents or grandparents. But based on the Tiebreaker rules stated on IRS publication 501, John should be treated as the qualifying child of his parents, so he is a dependent of his parents.

Step 2: Go through the rules below to determine if they can claim the American opportunity credit or lifetime learning credit.

Three general requirements that you must meet to claim the American opportunity credit or lifetime learning credit per IRS publication 970:

1. You pay qualified higher education expenses.
2. You pay the education expenses for an eligible student.
3. The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Additional rules:

For John’s grandparents: Since John is not their dependent, they can’t claim the American opportunity credit or lifetime learning credit.

For John’s parents: Since John is their dependent, they can claim the American opportunity credit or lifetime learning credit. The total qualified education expense they can use to claim the credit is $40,000 that is paid by them, John and his grandparents.

For John: if his parents do not claim an exemption on their return for him, he can claim the American opportunity credit or lifetime learning credit.The total qualified education expense he can use to claim the credit is $40,000 that is paid by him, his parents and his grandparents. 

Related Article(s)
Example - How to Claim Maximum Education Credits (American Opportunity Cedit or Lifetime Learning Credit)

How to Use Form 1098-T to Figure American Opportunity Credit or Lifetime Learning Credit

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