Education Tax Breaks for Your Federal Return
Lower Your Tax Bill By Claiming Tax Credits & Deductions for Education Expenses
If you, your spouse, or dependent child pursued a higher education, you may qualify for tax breaks on your federal return.
There are several tax credits and tax deductions for educational expenses, whether you are attending a four-year college or just taking a course to benefit your current job. The money you spend on tuition, enrollment fees, books, supplies, and housing costs for education can add up to big savings on your tax return.
Don’t miss out on a chance to save money on your taxes by utilizing these education tax breaks when you file your federal return.
Education Tax Credits
The most valuable tax breaks for education are in the form of tax credits. There are two main education tax credits offered by the IRS: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. Both of these credits can be applied to your tax liability directly and reduce what you owe, but only one can be used per individual and they each offer different benefits.
American Opportunity Tax Credit (AOTC)
This tax credit can only be used during the first four years of post-secondary education. The AOTC can be used for tuition, enrollment fees, and course material. It is worth up to $2,500 per year, per student. To be eligible, your annual modified adjusted gross income (MAGI) must be less than $90,000 (or $180,000 for married joint filers). The AOTC covers 100% of the first $2,000 of qualified education expenses you paid for each eligible student, and 25% of the next $2,000 of qualified education expenses for that student. This is a refundable credit – that means if it reduces your tax liability to zero, you can receive up to 40% ($1,000) of any remaining amount of the credit as a tax refund.
Lifetime Learning Credit
The Lifetime Learning Credit can also be used for tuition, enrollment fees, and course material. But unlike the AOTC, the Lifetime Learning Credit can be claimed throughout a student’s life and there is no limit on the number of years it can be used. This tax credit allows you to claim up to a $2,000 credit for qualified education expenses you paid for an eligible student. This tax credit is non-refundable, so the most it can do is reduce your tax liability to zero.
Note that there are eligibility requirements for these education tax credits, including income caps and limits on what is considered a “qualified educational expense” for each credit type. Additionally, you are only allowed to claim one of these education tax credits per year for each student. For more information, see IRS Publication 970 (Tax Benefits for Education).
Education Tax Deductions
Another way to receive a tax break for educational costs is through tax deductions on your 1040 return. Remember that a tax deduction will reduce your taxable income – as opposed to a tax credit, which is applied directly to your tax liability.
Tuition and Fees Deduction
If you don’t qualify for an education tax credit, this deduction can reduce your taxable income by up to $4,000 per student who is enrolled in an eligible educational institution. You cannot claim this deduction if your filing status is married filing separately or if you can be claimed as a dependent on someone else’s tax return. For more information, see IRS Tax Form 8917.
Student Loan Interest Deduction
If you paid interest on a qualified student loan, you may be able to deduct it on your tax return. This deduction can reduce your taxable income by up to $2,500. Note that your student loan must have been taken out to pay for qualified education expenses, and there are income restrictions for this tax deduction. For more information, see IRS Publication 970 (Tax Benefits for Education).
Work-Related Educational Expenses
If you are an employee and you itemize your deductions, you may be able to claim a tax deduction for expenses you paid for work-related education. To qualify, the education must be required by your employer (or the law) to keep your current job/salary or it must maintain/improve the skills needed in your present job. For more information, see IRS Publication 970 (Tax Benefits for Education).
If you paid for educational costs during the tax year, you may be able to claim one of the above tax breaks. Remember that you must have paid the expenses to an eligible educational institution – which is any university, college, trade school, or other post-secondary institution that’s eligible to participate in a student aid program via the U.S. Department of Education. For a list of schools that are qualified, see the U.S. Federal Student Aid Code List.
It’s recommended that you talk to a tax professional to help determine whether you can use one of these tax credits or deductions on your federal tax return.