Education Tax Credits and Deductions

Roxanna Guinan
by Roxanna Guinan, Contributor

Education tax credits and deductions can help individuals pursue their goals of obtaining higher education or improving their employment options. If you are struggling to pay college tuition-related bills for yourself (or a dependent) there are several incentives that may be able to help you ease that burden.

Under the American Recovery and Reinvestment Act (ARRA), the IRS modified the education tax credit formerly known as the Hope Scholarship Credit for tax years 2009 and 2010, and created the American Opportunity Tax Credit (AOTC). More people ― including those with higher incomes or even those with no income ― will now qualify for financial aid for college expenses. The full tax credit is available to individuals with modified adjusted gross income (MAGI) of $80,000 or less ($160,000 or less for married couples filing jointly). The credit is phased-out for taxpayers with incomes above these levels. Note that these income thresholds are higher than the limits for the Hope Scholarship and Lifetime Learning tax credits.

The Lifetime Learning Tax Credit is ideal for individuals who are seeking to enhance their education beyond a 4-year degree, as well as those who are looking to acquire new skills to advance in their current job or to seek new employment.  You cannot claim this tax credit if you are claiming the AOTC (above). If you’re eligible to claim the Lifetime Learning Tax Credit and you are eligible to claim the AOTC for the same student in the same year, you may choose to claim either credit, but not both.

If you pay qualified education expenses for more than 1 student in the same year, you can choose to take the education tax credits on a per-student, per-year basis. For example, you could claim the AOTC for one student and the Lifetime Learning Tax Credit for another student in the same year.

Highlights of both education tax credits include the following:

The American Opportunity Tax Credit (AOTC)
Formerly known as the Hope Scholarship Tax Credit

  • Available for the first 4 years of post-secondary education.
  • Allows for a tax credit up to $2,500 per student.
  • Up to 40% of the total tax credit may be refundable, meaning that that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student.
  • Covers tuition and fees, and course materials.

The American Opportunity Tax Credit is not available to graduate students who have already completed 4 years of college, although they may still qualify for the Lifetime Learning Tax Credit and the Tuition and Fees Tax Deduction. For details on these and other education-related tax benefits, see IRS Publication 970 (Tax Benefits for Education).

The Lifetime Learning Tax Credit

  • Available for undergraduate, graduate, professional degree students, and students acquiring or improving job skills.
  • Allows for a tax credit up to 20% of qualified expenses per taxpayer (not per student)
  • Covers the costs of tuition and fees, books, supplies, and equipment, paid to the institution as a condition of enrollment.
  • Tuition and fees deduction available for college, vocational school, or other accredited post-secondary education institution.

If you do not qualify for one of the above education tax credits, you may still be able to take advantage of a tax deduction for educational expenses. Depending on your income, you may be able to deduct up to $4,000 of qualifying tuition and fee expenses to help subsidize education expenses (college and post-high school) for you, your spouse, or your dependents.

Keep in mind that there are specific income limitations and eligibility requirements for these education tax benefits. Many states have unique tax credits and tax deductions for education that may differ from what the federal government offers. A qualified tax professional can help you determine whether you are eligible for a tax credit or a tax deduction, and which will be of greater benefit to you.