Education Tax Credits
Tax incentives available for your education expenses are credits (which reduce your taxes) and deductions (certain expenses reduce or offset your income). Each of these tax breaks have different qualifications and benefits.
Education credits are the American Opportunity Credit and the Lifetime Learning Credit.
- The American Opportunity Tax Credit (AOTC) is available to taxpayers for the first four years of college. Taxpayers eligible to claim the credit can benefit from:
- Up to a $2,500 education credit per eligible student
- The phaseout income limits are higher than the Lifetime Learning Credit and the former Hope Credit
- 40% of the credit is refundable, which means you may receive up to a $1,000 refund even if you don't owe any taxes
- With the Lifetime Learning Credit there is no limit on the number of years that can be claimed for each student so it is also available to graduate students. Some of the benefits of the credit include:
- A credit of 20% of up to $10,000 of qualified tuition and fees, up to a maximum of $2000
- Available even if a student takes one class
- Available to students even if not pursuing a degree
Typically, you can choose one or the other; after you enter all of your education information, TurboTax helps you make the best choice.
Education deductions can be taken in one or both of these ways:
- The Student Loan Interest Deduction
When you start paying back educational loans used for schooling, the interest portion can be a deduction, even if you don't itemize.
- The Tuition and Fees Deduction.
Certain tuition and other fees paid for education expenses can be a deduction on your taxes.
Qualifications for claiming the American Opportunity Tax Credit are:
- You paid qualified education expenses for higher education (see the next section)
- You paid education expenses for eligible students
- The eligible student is you, your spouse, or a dependent for whom you claim an exemption
- Your modified adjusted gross income is $90,000 ($180,000 if married filing jointly) or less (The credit is reduced between $80,000 and $90,000 ($160,000 and $180,000)
- You must be taking courses at an eligible education institution, which is any college, university, or vocational school with a student aid program administered by the US Department of Education.
And you must be considered an eligible student:
- You are enrolled at least half-time in a program leading to a degree,certificate, or other recognized credential
- You had at least one academic period beginning during the year
- You did not use the American Opportunity Tax Credit in any four previous years
- You did not completed the first four years of post-secondary education before the beginning of the year
You are not eligible to claim the American Opportunity Tax Credit if:
- Your filing status is Married Filing Separately.
- Taxpayer is listed as a dependent on another person’s return.
- You and your spouse were non-resident aliens.
- You have a felony drug conviction.
The following expenses qualify for the American Opportunity Tax Credit:
- Expenses paid for yourself, spouse, or dependent you claim as an exemption your return.
- Qualified education expenses which are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
- Student-activity fees, but only if the fees are paid to institutions as a condition of enrollment.
- Expenses paid for books, supplies, and equipment needed for course of study included whether or not purchased from the educational institution.
The following expenses do not qualify for the American Opportunity Tax Credit:
- Medical expenses(including student health fees)
- Room and board
- Transportation or
- Similar personal, living, or family expenses.
This is the case even if these expenses are paid to the institution as a condition of enrollment or attendance.
You are eligible to claim the Lifetime Learning Credit if all of the following requirements are met:
- You (or your dependent or a third party) paid qualified education expenses for higher education.
- You paid the education expenses for an eligible student.
- The eligible student is you, your spouse, or a dependent you claim an exemption for on your tax return.
- Your modified adjusted gross income is less than $65,000($130,000 if you are married filing jointly).
The credit is reduced between $55,000 and $65,000 ($110,000 and $130,000).
One of the advantages of the Lifetime Learning Credit is that you can take the credit every year for higher education as long as you meet the qualifying requirements.
Generally, if you paid for qualified education expenses for an academic period beginning in the year or in the first three months of the next year then you are allowed to take the Lifetime Learning Credit.
Qualified expenses are tuition and certain related expenses required for enrollment at an eligible institution. The course must be either part of a post secondary degree program or taken by the student to acquire or improve job skills.
Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses are paid to the institution as a condition of enrollment or attendance.
Note: the maximum Lifetime Learning Credit you can claim in a year is 20% of the first $10,000 of qualified education expenses you paid for all eligible students (or up to $2,000). The credit is reduced (phased out) if your modified adjusted gross income (MAGI) is between $55,000 and $65,000 ($110,000 to $130,000 if married filing jointly). Since this is not a refundable credit, the credit can't be more than your tax liability.