Unless you have wealthy parents or are blessed with a full-ride scholarship, your own or your children’s college education is going to be a financial challenge. In-state public colleges cost an average of $24,610 per year, and private universities boast a massive average annual tuition price of $49,320, according to the College Board. College seniors who borrowed money to pay those costs now graduate with an average of $37,172 in student loan debt.
While tuition costs are high and increases seem inevitable, there are ways to alleviate the financial burden. The federal government currently offers four incentives – tax credits and deductions – that can help you recoup some cash at tax time. A tax credit is one that directly reduces the amount of tax you owe, while a deduction reduces the amount of income on which your tax is calculated.
Here’s everything you need to know about education-related tax deductions and credits for college tuition and expenses. For help with other issues, check out our complete Tax Guide.
Tax Credits for College Students
1. American Opportunity Credit
Up to $2,500 tax credit, up to $1,000 refundable, four years maximum per student
To claim the American Opportunity Credit, you must have paid educational expenses either for yourself, your spouse, or for one of your dependents at an eligible post-secondary institution for the first four years of post-secondary studies. Expenses include tuition, required fees, college textbooks, and other required class supplies.
This is a direct dollar-for-dollar credit for the first $2,000 of eligible expenses. Thereafter, you can recoup 25% of the next $2,000 in eligible expenses up to a maximum total credit of $2,500. The credit first offsets your tax liability, after which up to $1,000 of this credit may be refunded to you.
Here are the major factors and rules to keep in mind:
- Frequency: You can claim one credit per student, per year. So, if you have multiple students, you can take this credit for each of them during the same year.
- Income Eligibility: To be eligible for any of the credit, your MAGI (modified adjusted gross income) must be less than $90,000 if filing single or head of household, or $180,000 or less if married filing jointly. However, the amount of the credit you can claim begins to phase out once your MAGI exceeds $80,000 or $160,000, respectively.
- Exceptions: You cannot claim this credit if you are filing as married filing separately.
- Refund: If you are due a refund, up to 40% of this credit can be refunded to you, for a maximum refund of $1,000.
- Enrollment Requirements: The student must be enrolled at least half-time and have no felony drug convictions.
- Calculations: The academic period to which expenses pertain must have begun during the same year expenses were paid, or during the first three months of the following year. For example, expenses paid in 2016 for classes that began in 2016 would be eligible if all other criteria are met. If you paid for classes in December of 2016 that started in January of 2017, these expenses would also be eligible. However, if you paid for classes in December of 2016, that started in May of 2017, you could not claim those expenses for the American Opportunity Credit until tax year 2017.
2. Lifetime Learning Credit
Up to $2,000 tax credit per return, non-refundable, can be claimed for an unlimited number of years
The Lifetime Learning Credit allows you to get a tax credit for tuition, fees, and required books and supplies for classes taken at any qualified educational institution. This tax credit does not have a limit on the number of years that it can be taken. If you continue to have eligible expenses, you can take this credit each year indefinitely.
Unlike the American Opportunity Credit, the student does not need to be enrolled in a degree-seeking program. Furthermore, he or she can be a graduate student, and you can get this credit for just a single class. You can deduct expenses paid for yourself, your spouse, or for any of your dependents as long as those expenses are required to be paid to the educational institution as a condition of enrollment or attendance.
Here are the primary things to keep in mind:
- Refundability: This credit is not refundable. You can only get your tax burden reduced with this credit – you cannot get a refund if the credit is in excess of the amount of tax you owe.
- Qualifying Expenses: The $2,000 maximum benefit covers qualifying expenses paid for yourself, your spouse, and your dependents. It’s simply based on expenses incurred and does not take into account the number of students. If more than one person is taking classes, you may get more benefit from the American Opportunity Credit, which you can claim on a per student basis. The academic expenses claimed must have been incurred during the same tax year or within the first three months of the next year.
- Limitations: You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student. However, if two students have qualifying education expenses, you may claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other. Your MAGI must be less than $65,000 if filing single or head of household, or less than $131,000 if married filing jointly. Plus, you cannot claim this credit if you file as married filing separately.
Tax Deductions for College Students
3. Tuition and Fees Deduction
Up to $4,000 tax deduction per return
The tuition and fees deduction is an adjustment to income, enabling you to reduce your taxable income by up to $4,000. You can deduct tuition, fees, and expenses required to be paid to qualified educational institutions as a condition of enrollment. You do not have to itemize your deductions to receive this benefit – it is taken on Form 1040, line 34. The expenses must be paid for you, your spouse, or your dependents. This adjustment has been available yearly, but make sure to check on its current status.
The main points to keep in mind are:
- Income Limits: Your MAGI must be $80,000 or less if single or head of household, and $160,000 or less if married filing jointly.
- Filing Restrictions: You cannot take this deduction if you are filing as married filing separately or if you can be claimed as a dependent on someone else’s return.
- Maximum Credit: You are limited to a deduction of $4,000, even if you have multiple students in the family. This deduction can be valuable if you’re unable to take the Lifetime Learning Credit because your income is too high.
- Qualifying Expenses: The academic expenses claimed must have been incurred during the same tax year or within the first three months of the next year.
4. Student Loan Interest Deduction
Up to $2,500 tax deduction per return
The student loan interest deduction allows you to deduct up to $2,500 for interest that you paid during the year on qualifying student loans. You do not need to itemize to take this deduction – it is an adjustment to income on Form 1040, line 33. Qualifying educational loans can be taken on behalf of yourself, your spouse, or your dependents. However, you must be legally obligated to repay the loan in order to take the deduction. If your benevolent uncle pays your student loan but is not legally obligated to repay the loan, you get the deduction, not your uncle.
Furthermore, you’re not eligible to deduct student loan interest if you are claimed as a dependent on someone else’s return. For example, if you claim your child as a dependent and they are paying the interest on a qualifying student loan, neither one of you can take the deduction. Your child is obligated to repay the loan but is your dependent, so cannot claim the interest deduction. You are not obligated to repay the loan, so cannot claim the interest deduction. Bummer.
There are several other things to keep in mind:
- Income Limits: Your MAGI must be less than $80,000 (single, head of household) or $160,000 (married filing jointly).
- Restrictions: You cannot deduct interest on a loan made to you by a relative or your employer. The loan must have been used to pay for tuition, fees, books, or housing expenses. Housing expenses qualify only up to the actual cost of housing and meals at the university, or an amount determined by the educational institution that was included in the federal financial aid determination. (If the student took out extra loans to cover more expensive housing than the university’s stated housing allowance, those excess amounts are not qualifying expenses, and the interest cannot be deducted.)
- Institution’s Eligibility: The determination of eligibility of an institution is made at the time that the loans are taken out. If the institution subsequently loses eligibility, that does not affect whether you can deduct the loan interest.
- Other Qualifying Expenses: You can also deduct loan origination fees at the time the loan was made, and you can deduct credit card interest if the credit card is used solely for eligible academic expenses. You cannot deduct student loan interest if your filing status is married filing separately.
5. Work-Related Education Expenses
You may be able to deduct work-related educational expenses as itemized deductions. To qualify, the education must:
- be to maintain or improve your job skills, or
- be a requirement of your employer or a law to keep your salary, status, or job, and
- not be to meet the minimum requirements of a new or first job.
Expenses that you can deduct include:
- Tuition, books, supplies, lab fees, and similar items
- Certain transportation and travel costs
- Other educational expenses such as the cost of research and typing
6. Educator Expense Deduction
If you are a K-12 teacher, instructor, counselor, principal or aide for at least 900 hours in a school year in a school that provides elementary or secondary education, you may qualify for an adjustment to income on Form 1040, line 23. Eligible educational expenses are unreimbursed expenses for:
- Professional development, books, supplies
- Computer equipment and related software or services
- Other equipment and supplemental materials for the classroom.
The maximum amount of the deduction is $250 ($500 if MFJ, but no more than $250 per spouse if both are K-12 educators). Any excess expenses can be claimed on Schedule A, Itemized Deductions, as a miscellaneous deduction subject to 2% of AGI. For further limitations on the deduction, see Tax Topic 458.
It is important to understand that you cannot use the same expense to claim different credits or deductions. For example, you cannot claim the tuition and fees deduction and one of the education credits for the same expenses. However, you can take the student loan interest deduction and an education credit (or deduction) during the same tax year if you paid eligible education expenses as well as interest on a qualifying student loan. Speak with an experienced tax preparer or reference top-rated tax software if you need help determining the best way to deduct eligible expenses.
For help with other issues, check out our complete Tax Guide.
Did you or one of your family members attend school in the past year? Which education-related tax deductions are you eligible to claim?