A college education is expensive, but there is a silver lining: Certain tax credits and deductions for tuition and fees can help reduce the cost.
According to Student Loan Hero, 2018 college graduates left school with an average student loan debt balance of $29,800. Any available tax benefits might help to reduce the amount students and parents need to borrow.
Comprehensive information about all education-related tax benefits is available in IRS Publication 970, “Tax Benefits for Education.” Here’s a summary of the tax credits and deductions that the federal government currently offers, and the rules to qualify for them:
Tax credits, which include the American Opportunity Tax Credit and the Lifetime Learning Credit, lower what you owe in taxes. They are a dollar-for-dollar reduction of your tax bill.
Tax deductions, on the other hand, decrease the total amount of income you pay taxes on. This includes the Student Loan Interest Deduction.
There are two types of education tax credits available: the American Opportunity Tax Credit and the Lifetime Learning Credit. Eligibility and benefits are different for each, but there are some features shared by both.
According to the IRS, you must meet all three of the following criteria in order to be eligible for either of the two education tax credits:
- You, your dependent or a third party has paid qualified education expenses for higher education. Qualified education expenses include tuition and fees required for enrollment or attendance.
- The eligible student is enrolled at a qualifying educational institution. The IRS defines an eligible educational institution as one that qualifies for federal student aid. To determine if your school is eligible, go to fafsa.gov and make sure it has a Federal School Code.
- The eligible student is yourself, your spouse or a dependent on your tax return.
With only limited exceptions, to be eligible to claim either the American Opportunity Credit or the Lifetime Learning Credit, the law requires a taxpayer (or his or her dependent) to have received Form 1098-T, Tuition Statement, from an eligible educational institution. Form 1098-T reports tuition and fees paid, along with other information.
You are not eligible for tax credits if you are a married couple filing separately.
American Opportunity Tax Credit
Who is eligible?
You are eligible for the American Opportunity Tax Credit if the student in question meets the three main criteria applicable to tax credits (outlined above), plus the following:
- Has not completed four years of college credits.
- Is enrolled at least half-time during one academic period, or semester, for the tax year.
- Is enrolled in a program in pursuit of a degree or certificate.
Your modified adjusted gross income also must be $90,000 or less, or $180,000 for married couples filing jointly.
How much is the tax credit worth?
The American Opportunity Tax Credit is worth up to $2,500 per year per eligible student. This covers tuition and fees required for enrollment or attendance.
Do you get a refund if you don’t owe any taxes?
Yes. You can get up to 40% of the tax credit or $1,000 refunded to you.
Lifetime Learning Credit
You are eligible to claim the Lifetime Learning Credit if the student in question meets the three primary criteria for tax credits above and is enrolled in at least one course during the tax year. Plus, your modified adjusted gross income must be $67,000 or less, or $134,000 for married couples filing jointly.
This is an easier tax credit to qualify for, as the eligible student:
- Need not be pursuing any degree or certificate.
- Can be an undergraduate or graduate student.
- Can have completed more than four years of college credits.
But you may only claim the Lifetime Learning Credit for one student per tax return.
How much is the tax credit worth?
The Lifetime Learning tax credit awards up to $2,000 per return. This covers tuition and fees required for enrollment or attendance.
Is the tax credit refundable if you don’t owe any taxes?
This tax credit is not refundable.
What if you qualify for both tax credits?
You can only claim one of them per student, per year.
Can you qualify for tax credits for multiple students?
Yes, but you can only claim one per student. You may claim the American Opportunity Credit for multiple students. However, you may only claim the Lifetime Learning Credit for one student (so a maximum of $2,000 per return).
How do you apply for an education tax credit?
Fill out Form 8863 and attach it to your Form 1040 or 1040A.
Before we jump into the tax deductions available, a quick note on eligibility. You are not eligible for either education tax deduction if:
- You are a married couple filing separately.
- You are claimed as a dependent on someone else’s tax return.
Now let’s take a closer look at the deductions you could be eligible to claim if the above don’t apply.
Tuition and Fees Deduction
The federal government previously offered a tax deduction for tuition and fees. This deduction expired at the end of 2017.
Student Loan Interest Deduction
You are eligible for the Student Loan Interest Deduction if:
- The eligible student was enrolled in a degree or certification program at least half-time.
- The loan is in your name or your spouse’s name.
- The loan was taken out solely to pay qualified education expenses.
- You have a modified adjusted gross income of less than $80,000, or $165,000 if married and filing jointly.
How much is the tax deduction worth?
The Student Loan Interest Deduction will reduce your taxable income by up to $2,500 per tax return.
Peter Fleming contributed to this report.