How to Take the American Opportunity Credit as a Graduate Student

The American Opportunity Tax Credit (AOC) is a tax credit that lowers the cost of acquiring an undergraduate degree in each of the four years that's typically required to earn an undergraduate degree. The taxpayer who funds the degree receives a maximum annual credit of ​$2,500​ per eligible student. If you have no earned income and thus owe no tax, the person who pays the educational expenses may receive a refund equal to ​40 percent​ of the maximum credit, or ​$1,000​. The AOC credit is subject to taxpayer income limitations.

As a graduate student, you aren't eligible to receive the AOC as it relates specifically to an undergraduate college degree. You may be eligible, however, to receive the Lifetime Learning Credit.

When a parent or student claims the Lifetime Learning Credit (LLC), that taxpayer lowers her tax bill by as much as ​$2,000 or 20 percent​ of the first ​$10,000​ of school tuition and fees (per the IRS). Eligible fees exclude living and transportation expenses.

Eligible students enrolled in courses at an eligible college, university, vocational school or other postsecondary institution (including courses to acquire or improve job skills) can claim the Lifetime Learning Credit. There is no limit on the number of years the student can claim the credit.

According to the IRS, the purpose of the LLC is to grant financial relief to the student or parent who finances undergraduate, graduate and professional degree courses – including those needed to acquire or improve job skills. That taxpayer can claim the tax credit any year in which the student takes a course to enhance her skills.

For a student's parent(s) to claim the credit, the student must be listed on the parent's tax return as a dependent. The taxpayer can claim the American Opportunity Tax Credit as well as the Lifetime Learning Credit, but not in the same tax year.

The dollar amount of the LLC tax credit that a taxpayer can claim is limited by her modified adjusted gross income (MAGI). To qualify for the entire tax credit of ​$2,000​, the single filer's MAGI must be ​under $59,000​ or less in 2021. In turn, the income of the paying parents who file taxes jointly must be ​$118,000​ or less to claim the entire credit.

If the MAGI of the single filer is more than ​$59,000​ but less than ​$69,000​, the tax credit the taxpayer can claim is reduced. The same is true for parents who file jointly and earn more than ​$118,000​ but less than ​$138,000​. The LLC tax credit is not available to those whose income exceeds ​$135,000​. Instead of phasing out at income levels starting at ​$59,000​ for single filers or ​$118,000​ for joint filers, the phaseout begins at ​$80,000​ for single filers and ​$160,000​ for joint filers.

The Lifetime Learning Credit reduces the tax liability for the taxpayer who funds the education or training. For instance, if the tax payer owes ​$5,000​ in taxes for 2021 and receives the maximum ​$2,000​ credit, that person's payment to the IRS will be only ​$3,000​, or ​$5,000​ tax liability minus ​$2,000​ tax credit. To qualify for the Lifetime Learning Credit, the taxpayer must have earned income and owe taxes.

In January of the tax filing year, a student's university or training school will send the qualifying party a Form 1098-T. This form is a tuition statement that documents the education expenses the taxpayer funded for the year. You use the information reported on the form to claim the tax credits.