6 Education-Related Tax Credits & Deductions for College Tuition & Expenses

6 Education-Related Tax Credits & Deductions for College Tuition & Expenses

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.

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:

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:

college student calculating tax credits

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:

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:

You may be able to deduct work-related educational expenses as itemized deductions. To qualify, the education must:

Expenses that you can deduct include:

To take the deduction, you must fill out Form 2106, Employee Business Expenses, the total of which transfers to Schedule A, line 21, miscellaneous deductions subject to 2% of adjusted gross income.

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:

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?

Categories: Careers, College & Education, Money Management, Taxes

Gary’s extensive professional background varies from small business owner to school administrator. Most recently, he has been involved in taxes, first as a certified preparer, and later as a tax software developer. He is currently licensed to practice before the IRS, volunteers as an instructor for AARP’s Tax-Aide program, and has his own tax practice.

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6 Education-Related Tax Credits & Deductions for College Tuition & Expenses

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