Though rewarding, pursuing a higher education degree program can be very costly for the average taxpayer. To help ease some of this cost there are education credits and deduction in place to offset some of the expenses paid by the student to either reduce the taxes owed or increase the tax refund. If a student obtained a loan or paid out of pocket to attend college, they may be qualified to claim either one of the credits or the deduction.
Students are given the option to choose between the credits and deduction based on qualification. However, in most cases the credit is more favorable rather than the deduction. These credits are the American Opportunity Tax Credit and Lifetime Learning Credit, while opting to claim the tuition and fees deduction is another option. In order to claim the:
American Opportunity Tax Credit (AOTC): The student must be pursuing a degree or other recognized education at a qualified higher education institution. This credit can only be claimed a maximum of 4 times throughout the student’s higher education program. If the student is being claimed by a parent or guardian, that taxpayer is then able to take advantage of this credit, as well as in the case of a spouse having student status. This credit is worth a maximum of $2,500, of which only up to $1,000 (40%) of the credit is refundable. Some exceptions include:
The student, parent/guardian, and spouse must have a valid Taxpayer Identification Number.
Must not have been convicted of any drug felony as of the last day of the tax year.
If the total amount of Modified Adjusted Gross Income (MAGI) has exceeded $80,000 ($160,000 joint filers) the credit will begin to phase out, however, once the MAGI has surpassed $90,000 ($180,000 joint filers) this credit can no longer be claimed.
Lifetime Learning Credit (LLC): The student must have been enrolled and have taken courses at an eligible education institution. Therefore, taxpayers claiming this credit does not have to only be pursuing a 4-year degree program. For graduate student this is often an appealing option. This is a non-refundable credit that is worth a maximum of $2,000.
This credit begins to phaseout when the taxpayer’s MAGI is between $58,000 and $68,000 ($116,000 and $136,000 joint filers). Therefore, once the taxpayer’s MAGI exceed $68,000 ($136,000 joint filers) the credit can no longer be claimed.
There is no limit on the number of years this credit can be claimed
Tuition and Fees Deduction: Similar to the Lifetime Learning credit, this deduction can be claimed by any qualified taxpayer who has incurred education expenses while enrolled in higher education, especially, if the taxpayer may not have been eligible to claim neither the AOTC nor LLC. The maximum deduction amounts available to be claimed is up to $4,000 in tuition expenses. Exceptions include:
Only valid for tuition expenses paid by the taxpayer
Can not be claimed if the filing status is married filing separate (MFS) or if you can be claimed on someone else’s tax return
This deduction begins to phase out when the taxpayer’s MAGI is $80,000 ($160,000 joint filers)
To claim either of the education credits listed above, the taxpayer must have received a Form 1098-T, Tuition Statement for the institution in which they were enrolled by January 31st of the current year. As for claiming the deduction, the taxpayer must have documented all expenses that were associated with attending school. In other words, expenses that are claimed must be substantiated and documented. Whether the taxpayer is claiming an education credit or deduction it must only be for qualified education expense, which does not include living, personal, family expenses. For example, room and board does not qualify as an education expense for the purposes of these credits and deduction.
Neither the education credits nor deduction can be claimed if the taxpayers filing status is married filing separate (MFS) or if they can be claimed on someone else’s tax return
For a deeper insight on how taxes affect and impact students please refer to IRS Publication 970, https://www.irs.gov/pub/irs-pdf/p970.pdf .