How To Take Advantage Of Education Tax Credits

In recent years, the cost of college has skyrocketed. According to The College Board, for the 2019-2020 academic year the average cost of tuition and fees at a private university was $36,880  and $10,440 at a four-year public university.

With such a high cost, you need every break you can get to make it more affordable. To give students and their families some relief, the federal government created education tax credits that can effectively lower your school costs.

Here’s what you need to know about the different tax credits for education and how to claim them when you file your tax return.

What Are Education Tax Credits?

A tax credit reduces the amount of taxes you owe, giving you a dollar-for-dollar reduction in your tax bill.

Education tax credits help offset the cost of going to college by reducing how much you owe on your tax return. And, if the credit reduces your tax bill to less than zero, you could even qualify for a refund and get cash to use for your education expenses, like textbooks and supplies.

Who Can Claim Education Tax Credits?

While each education tax credit has its own eligibility requirements, there are some general guidelines you must meet before you can claim the tax credits:

• You or your dependent must pay qualified education expenses for college, such as tuition or student activity fees
• The student must be enrolled at an eligible educational institution, meaning the school must participate in a student aid program run by the U.S. Department of Education
• The eligible student is yourself, your spouse or a dependent listed on your tax return; if you pay tuition for a family member who is not a dependent, you cannot claim the education tax credits on your tax return

As of 2020, there are two available tax credits for education expenses: the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC).

American Opportunity Tax Credit

You can claim the AOTC during your first four years of higher education and receive an annual credit up to $2,500. If the credit reduces your tax bill to zero, you can get up to 40% of the remaining amount refunded to you, up to a maximum of $1,000.

How it Works

The credit is 100% of the first $2,000 you spend on qualified education expenses and 25% of the next $2,000 you spend on qualified expenses.

Let’s say you spent $5,000 this year on college tuition. The AOTC would give you a $2,000 credit for the first $2,000 you spent, and 25% of the next $2,000 for a total of $2,500. You wouldn’t get any credit for the remaining $1,000 you spent on tuition costs.

If you had a tax bill of $750 before claiming the credit, it would reduce your bill to zero. Under the AOTC’s rules, you can get up to 40% of the remainder as a refund. In this case, you would get 40% of $1,750—the remaining amount of the AOTC after paying your tax bill—and get $700 in cash.

Eligibility Requirements

To qualify for the AOTC, you must meet the following criteria:

• You are pursuing a degree or other recognized credential
• You were enrolled at least half-time for at least one academic period beginning in the tax year
• You have not yet completed four years of higher education
• You have not claimed the AOTC for more than four tax years
• You do not have a felony drug conviction on your record
• Your modified adjusted gross income (MAGI) is under $90,000 (or $180,000 for joint filers). If your MAGI is over $80,000 but less than $90,000 (or over $160,000, but less than $180,000 for joint filers), you’ll receive a reduced amount of the credit.

Your school will send you Form 1098-T, your tuition statement, which you can use to fill out Form 8863 and claim the tax credit.

Lifetime Learning Credit

Unlike the AOTC, which can only be claimed for four years, there is no limit on how many years you can claim the LLC. It can be used to offset the cost of undergraduate, graduate or professional degree courses.

How It Works

The amount of the credit is 20% of the first $10,000 spent on qualified education expenses or a maximum of $2,000 per tax return. While the AOTC is refundable, the LLC is not, so you won’t get a refund if the LLC reduces your tax bill to zero.

Eligibility Requirements

To claim the LLC, you must meet the following requirements:

• You’re enrolled at or taking courses at an eligible institution
• You’re taking courses to get a degree, recognized credential or to improve job skills
• You’re enrolled for at least one academic period in the tax year
• Your income must be less than $68,000 ($136,000 if married filing jointly). If your income is between $58,000 and $68,000 (or $116,000 and $136,000 if filing jointly), you’ll receive a reduced tax credit.

You can claim the LLC by using Form-1098 to fill out Form 8863 and attach it to your tax return.

Other Tax Benefits for Education Costs

While tax credits reduce your tax bill, tax deductions reduce your taxable income and can potentially lower your tax bracket.

There are two tax deductions you can claim for education expenses: the student loan interest deduction and the tuition and fees deduction.

Student Loan Interest Tax Deduction

If you have student loans and have started making payments on them, you may be able to deduct some or all of the interest you’ve paid during the tax year. With the student loan interest tax deduction, you can deduct $2,500 or the amount of interest you paid, whichever is less. Interest paid on both federal and private student loans qualifies for the deduction.

The deduction can be claimed as an adjustment to your income, and you don’t have to itemize your deductions to qualify for the credit.

To qualify for the deduction, you must be legally obligated to repay a qualified student loan, and your filing status cannot be married filing separately. The deduction is gradually reduced if your MAGI is between $70,000 and $85,000, and you can’t claim the deduction at all if your MAGI is $85,000 or more (or $170,000 if filing a joint return).

Tuition and Fees Tax Deduction

With the tuition and fees deduction, you can reduce your taxable income by as much as $4,000 for tuition and fees you paid to eligible postsecondary institutions.

To qualify for the deduction, your MAGI must be less than $80,000 ($160,000 if married filing a joint return). You must complete Form 8917 to claim the tuition and fees deduction.

While the tuition and fees tax deduction was set to expire in 2017, the federal government extended it so that taxpayers can claim the deduction through 2020.

No Double Benefits

While there are multiple education tax credits and deductions you may be eligible for, the IRS restricts how many education benefits you can receive. You can’t take more than one education benefit for the same student and expenses. For example, you cannot claim both the AOTC and the LLC; you can only claim one.

You can use the IRS tool “Am I Eligible to Claim an Education Credit?”  to see what credits and deductions you’re eligible for, and which would give you the best value.