Many taxpayers get little to no benefit from the education credits either because they make too much or their students get scholarships.
As with most credits and deductions, the IRS has policies to phase out the benefit once a taxpayer reaches a certain level of income. With respect to the tuition and fees deductions
The deduction is $0, $2,000 or $4,000 depending on your Modified Adjusted Gross Income (MAGI).
- $4,000 deduction for MAGI of $65,000 or less ($130,000 or less for joint returns).
- $2,000 deduction for MAGI between $65,001 and $80,000 (between $130,001 and $160,000 for joint returns).
- $0 if your MAGI exceeds these limits.
The reason you may see "no net qualified education expense" is because the IRS does not allow students to take a credit just for being a student. If the student gets scholarships that cause them to pay nothing out of pocket, then there is no credit and sometimes any overage is considered income to the student. The IRS says that a credit is used to offset any "cost" to the student so if there is no cost then there is no credit.
For the AOTC and Lifetime Credits:
These expenses qualify, as long as they are required to enroll in or attend a qualified educational institution:
- Tuition, if paid to the institution
- Student-activity fees, if paid to the institution
- Books, supplies, and equipment, if required to be purchased from the institution (Lifetime Learning Credit)
- Books, supplies, and equipment, regardless of where purchased (American Opportunity Credit)
Fees paid for non-credit courses and sports (or similar activities) don't qualify unless:
- The course or activity is included in the student’s degree program, or
- The course helps the student acquire or improve job skills (Lifetime Learning Credit only)
These expenses are not considered qualified education expenses for either credit:
- Tutoring
- Housing, room and board
- Insurance, including student health fees
- Medical or dental expenses
- Transportation
- Entertainment, babysitting, and other personal expenses
