763 / What limitations and phaseouts apply to the Hope Scholarship (American Opportunity) and Lifetime Learning Credits?

The Code sets forth special rules coordinating the interaction of the Hope Scholarship (American Opportunity) and Lifetime Learning Credits. The Lifetime Learning Credit is not available with respect to a student for whom an election is made to take the Hope Scholarship Credit during the same taxable year.¹ However, the taxpayer may use the American Opportunity Credit for one student and the Lifetime Learning Credit for other students in the same taxable year.

Both credits are subject to the same phaseout rules based on the taxpayer’s MAGI. MAGI is the taxpayer’s adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. The maximum credit in each case is reduced by the credit multiplied by a ratio. Prior to 2021, for single taxpayers, the ratio equals the excess of (i) the taxpayers’ MAGI over $40,000 to (ii) $10,000. For married taxpayers filing jointly, the ratio equals (a) the excess of the taxpayer’s MAGI over $80,000 to (b) $20,000.² The $40,000 and $80,000 amounts are adjusted for inflation and rounded to the next lowest multiple of $1,000.³

For 2020, the threshold amounts were $59,000 for single taxpayers and $118,000 for married taxpayers filing jointly for the Lifetime Learning Credit. For 2019, the threshold amounts were $58,000 for single taxpayers and $116,000 for married taxpayers filing jointly. For 2018, the threshold amounts were $57,000 for single taxpayers and $114,000 for married taxpayers filing jointly. The threshold amounts for the American Opportunity Credit are $160,000 for married taxpayers filing jointly and $80,000 for single taxpayers for tax years after 2020.

The amount of qualified tuition and related expenses for both credits is limited by the sum of the amounts paid for the benefit of the student, such as scholarships, education assistance advances, and payments (other than a gift, bequest, devise, or inheritance) received by an individual for educational expenses attributable to enrollment.⁴ The IRS has determined that qualified tuition and related expenses paid with distributions of educational benefits from a trust could be used to compute American Opportunity and Lifetime Learning Credits if the distributions were included in the taxable income of the beneficiaries.⁵

Neither credit is allowed unless a taxpayer elects to claim it on a timely filed (including extensions) federal income tax return for the taxable year in which the credit is claimed. The election is made by completing and attaching Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to the return.⁶ Neither credit is allowed unless the taxpayer provides the name and the taxpayer identification (i.e., Social Security) number of the student for whom the credit is claimed.⁷

If the student is claimed as a dependent on another individual’s tax return (e.g., parents) he cannot claim either credit for himself, even if he paid the expenses himself.⁸ (The Service has privately ruled that a student was entitled to claim a Hope Scholarship Credit on his own return even though his parents were eligible to claim him as a dependent, but chose not to do so.⁹) However, if another individual is eligible to claim the student as a dependent, but does not do so, only the student may claim the Hope or Lifetime Learning Credit for his own qualified tuition and related expenses.¹⁰ Both credits are unavailable to married taxpayers filing separately.¹¹ Neither of these credits is allowed for any expenses for which there is a deduction available.¹² Taxpayers are not eligible to claim an American Opportunity or Lifetime Learning Credit and the deduction for qualified higher education expenses in the same year with respect to the same student.¹³

A taxpayer may claim an American Opportunity or Lifetime Learning Credit and exclude distributions from a qualified tuition program on behalf of the same student in the same taxable year if the distribution is not used to pay the same educational expenses for which the credit was claimed.¹⁴ See Q 687.

A taxpayer can claim an American Opportunity or Lifetime Learning Credit and exclude distributions from a Coverdell Education Savings Account (ESA – see Q 681) on behalf of the same student in the same taxable year if the distribution is not used to pay the same educational expenses for which the credit was claimed.¹⁵ A taxpayer may elect not to have the American Opportunity or Lifetime Learning Credit apply with respect to the qualified higher education expenses of an individual for any taxable year.¹⁶

Reporting. For the reporting requirements for higher education tuition and related expenses, see IRC Section 6050S.¹⁷ For the reporting requirements for qualified tuition and related expenses, see Treasury Regulation Section 1.6050S-1; TD 9029.¹⁸