College Tax Deduction & Education Tax Credit Information

There are a variety of tax benefits available for education-related expenses, such as credits and deductions. Both credits and deductions can help families save money by reducing the amount of taxes you pay for the year.

Generally, the credit or deduction needs to be filed for the parent or student who paid the related expense. This means, a parent and dependent student may not file for the same credit, for the same expense, in the same year.

Education Tax Credit Overview

Credits are tax benefits that reduce your income tax. There are currently three education credits you may be eligible for: the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit. Tax filers cannot claim multiple credits for the same filer in the same year, so choose the option that is most beneficial to you.

Here’s a quick overview of the different credits that are currently available:

Credit Feature American Opportunity Credit Lifetime Learning Credit
Maximum Benefit $2,500 $2,000
Eligible Years Max. of 4 years,
after 2008
No limit
Income Limit $80,000 single, $160,000 married $61,000 single, $122,000 married
Required half-time enrollment in degree program Yes No
Refundable Yes, up to 40% No

To qualify for these credits, you must meet the following criteria as defined by the IRS:

  • You pay qualified education expenses
  • The student for whom you pay is considered "eligible"
  • The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption

American Opportunity Credit

This credit is a modification to the older Hope Credit, and is available to a wider range of taxpayers. The maximum annual amount for this credit is $2,500 per eligible student, and many of those who are eligible qualify for the full amount. To qualify for the full amount, individuals must have an Adjusted Gross Income (AGI) of $80,000 or less, and $160,000 or less for married couples.

An eligible student is one who:

  • Has not completed the first 4 years of college before the start of the tax year
  • Did not have expenses that were factored into an American opportunity or Hope credit in any 4 earlier tax years
  • Was enrolled at least half-time in a degree program for at least one academic period
  • Has not been convicted of a felony for having or selling controlled substances

Hope Credit

This credit was the precursor to the American Opportunity Credit and only applies to tax year 2008 or earlier. The eligibility criteria and credit information is similar except that the Hope Credit only applies to the first two years of an eligible student’s schooling (the AOC applies to all four). Additionally, the American Opportunity Credit extended the maximum to $2,500.

Lifetime Learning Credit

For each eligible student, tax filers can claim a credit of $2,000 for money paid towards qualified education expenses. There is no limit to the number of times this credit can be claimed. Additionally, the student is not required to pursue a degree, rather, it can be used for individual courses and certifications.

An eligible student is one who is enrolled in one or more courses at an eligible educational institution.

The income limits for claiming this credit are $122,000 if married or filing jointly, or $61,000 if single. This is a nonrefundable credit, which means it can reduce your owed taxes to zero, but excess will not be refunded to the taxpayer.

Education Tax Deductions Overview

A tax deduction is a benefit that reduces your amount of taxable income, thereby reducing the amount you have to pay. This is not the same as a credit because instead of reducing your taxes directly, a deduction reduces the income that gets taxed.

Here’s a quick breakdown of the different deductions:

Deduction Feature Student Loan Interest Deduction Tuition and Fees Deduction Business Deduction for Work-Related Education
Maximum Benefit $2,500 $4,000 Cost of expenses exceeding 2% of MAGI (Modified Adjusted Gross Income)
Income Limit $75,000 single, $150,000 married $80,000 single, $160,000 married None
Deductible Expenses Student loan interest paid on a qualifying student loans for the year Tuition and other fees required for enrollment at an eligible school Amount paid toward work-related education expenses
Claiming the Deduction Adjustment to income, no itemization needed Adjustment to income, no itemization needed Itemize deduction on Schedule A
Student Eligibility Must be enrolled at least half-time in a degree or certificate program Must be enrolled in one or more courses at an eligible school Must be working, itemize deductions, file a Schedule C, and have qualifying expenses

Tuition and Fees Deduction

This benefit allows students or parents to deduct qualifying education expenses paid for the year. It can reduce your taxable income for a given year by up to $4,000 and is available even if you do not itemize your deductions.

To claim the deduction you must pay qualifying educational expenses for either yourself, your spouse, or your dependent. Additionally, your income must not exceed $80,000 if single, or $160,000 if married.

Qualifying expenses include:

  • Tuition
  • Mandatory fees
  • Other expenses required for enrollment

This does not include room and board, living expenses, student activity fees or other personal expenses.

This deduction cannot be claimed if you also claim the American Opportunity Credit for the same student in the same year.

Student Loan Interest Deduction

This deduction can be used on any interest paid on qualified student loans in the tax year.

According to the IRS, a qualifying student loan is one that you took out solely to pay for qualifying education expenses. The expenses must have been:

  • For you, your spouse, or your dependent
  • Paid within a reasonable period of time before or after the loan was taken
  • For education provided to an eligible student during an academic period

Business Deduction for Work-Related Education

Employees that take courses for work may qualify to claim their expenses as a business expense. All qualifying expenses that exceed 2% of your Modified Adjusted Gross Income (MAGI) are considered eligible to claim this benefit.

Work-related education qualifies if it meets the following conditions:

  • The education is required in order to keep your present salary, either by the employer or by law
  • The education either maintains or improves skills that are required for your current line of work

This deduction is not available for courses that could lead to a new trade or business or to gain the minimum education needed for your line of work.

For more information on any of the aforementioned credits and deductions, please reference Publication 970 from the Internal Revenue Service.