Back to School: Education Tax Credits and Deductions Help You Save at Tax-Time

Education

To combat the ever increasing price of college education, the tax code provides some relief via education tax credits and deductions.

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent.  Here’s what you need to know about education tax credits and deductions that will save you money at tax-time.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is a credit for eligible expenses related to undergraduate college education. Qualifying expenses include not only tuition but also course-related books, supplies, and other equipment.

The American Opportunity Tax Credit was set to expire at the end of 2012, but thanks to the passage of the American Taxpayer Relief Act of 2012, the tax credit was extended to December 31, 2017.

How much is the American Opportunity Tax Credit Worth?

First, remember that a tax credit is superior to a tax deduction.  Unlike a tax deduction, a tax credit reduces the amount you owe (or increases the size of your refund) dollar-for-dollar in the amount of the credit.  The maximum 2013 American Opportunity Tax Credit is $2,500 per student.  To qualify, you must have spent at least $4,000 in qualifying education expenses.

As a partially refundable credit, a maximum of 40% of the credit is payable to you even if you incur no tax liability for the year.

Who Can Take the American Opportunity Tax Credit?

Virtually any taxpayer with qualifying education expenses can take the American Opportunity Tax Credit except certain high-earners.  Single filers with modified adjusted gross income (MAGI) between $80,000 and $90,000 will have their credit reduced.  Single taxpayers with modified adjusted gross incomes above $90,000 cannot claim the credit.  The corresponding phase-out range for married couples filing jointly is $160,000 to $180,000.

Does the American Opportunity Tax Credit Cover All Educational Expenses?

To qualify for the education tax credit, the expense must relate to the first four years of post high-school education. If you’re a graduate student, TurboTax will give you other education tax credits and deductions you’re eligible for, like the Lifetime Learning Credit or the Tuition and Fees Deduction.

What Can You Tell Me About the Tuition and Fees Deduction?

The tuition and fees deduction maximizes at $4,000, provided you have spent at least $4,000 in tuition and fees. But note that it is a deduction – not a credit. Another key difference between it and the American Opportunity Tax Credit is that the tuition and fees deduction upper income phase-out range is slightly lower.  No deduction is available for singles with modified adjusted gross income in excess of $80,000 or joint filers whose income exceeds $160,000.

Can I Take Both the Tuition and Fees Deduction & the American Opportunity Tax Credit?

Good thinking-but no.  Even if you have more than $4,000 of qualifying expenses, you can’t benefit from both of these tax saving programs in the same year.  Fortunately, TurboTax will choose the option you’re eligible for that minimizes your tax liability.

Comments (156) Leave your comment

  1. I have worked full time while my fiance has gone to school full time. Would it benefit us on taxes to go ahead and get married before the year is over? With a new home and all the expenses that come with it, we are looking to get the biggest refund possible.

  2. I have a daughter from a previous marriage, I have never claimed her on my taxes. She starts college in the fall and I have about 30 series I bonds totaling 21000, 6000 of this is interest. May I liquidate the bonds as she needs them to make monthly payments and still be able to claim the interest portion under an educational deduction or would I have to pay on the interest portion of each bond?

  3. Hi,
    I am USA citizen and an undergraduate student. I am married. The funds provided through FAFSA is not sufficient to pay tuition fees of the university. Both of us are full time students and I am also working as part time. My husband is a graduate assistant in the university.

    Would you please tell me which way is better in paying tuition fees, either taking education loan or paying by ourselves while considering joint tax return filing for 2014?

    I mean which approach is more beneficial?
    Does the system of tax return pay more money back if we pay ourselves or if we mention education loan for tuition fees?

    Thank you.
    Nams

    1. Hi Nams,

      Tuition expenses paid from student loans or from personal funds are treated the same for education credits and deductions. You will have to determine the benefits of borrowing for education based on your personal situation.

      Thank you,
      Mary Ellen

    1. I run the current TurboTax program for the next year & estimate my taxes. If it asks you things like 2013, just substitute 2014 in your mind when answering the questions & supply them with available 2014 data or the available data and an estimate. It’s worked very well for the last several years.

  4. Can my husband’s ex-wife claim our son if she paid for some of his college tuition? He lives with us when he is home and his license and voter’s registration is our address. we have claimed him for the past 4 years bc he lives with us and this is his home. This year, she claimed him even though he never slept a night at her house. We paid for his schooling too.

    1. It would depend on what the custodial agreement looks like. In my case I provided nearly 3/4 of my step-daughters support in her 18th year & according to the IRS I was not able to claim her because the agreement said that the biological father had the right to claim her even though he hadn’t said a word to his daughter in more than 10 years.

    2. Hi Laura,
      Who gets to claim your son depends on which one of you supplied over half of his support. If your son is over 24 and made over $3,900 neither of you would be able to claim him.
      Thank you,
      Lisa Greene-Lewis

  5. If you’re a student but financial aid paid for supplies/tuition can you still claim the American Opportunity Credit?

  6. Last year, I took money out of an IRA to help my son pay for graduate school. Will I be able to deduct this? I was told that the amount I took out of the IRA would be taxed, but since 80% of it was used to help pay for his tuition and other expenses, does that still apply to the full amount?

    1. I believe you can enter the amount on the worksheet for form 5239. While you won’t be able to deduct the entire amount, at least you’ll get a 10% credit of the amount spent. If you took the money out before you reached the age of 59-1/2, you’d have a 10% penalty. This way at least you’d mitigate the penalty for the amount you spent on “higher education”.

    2. FORM 5329 is for abating the 10% PENALTY. The IRS may waive the penalty, NOT the tax for an IRA/Roth distribution in a year that you have education expenses on your return. The expenses may even include room and board, BUT you need to consult your tax advisor!!!!! This can be a very complex calculation with lots of technical terminology. I know because I do them on a daily basis. Good luck!

      1. Yes, form 5329 is for abating the 10% penalty. However if you’ve gone through all the other “complex” calculations and you find that all you can do is reduce or eliminate the penalty, it’s better than nothing. That is what I did and it saved me nearly $1000 in penalties.

  7. I did my 4 yrs of undergraduate degree in India. I am working in USA on work visa, also, I am doing Master degree in USA. Of course I never claimed for American Opportunity Credit (AOC) since I didn’t do my undergraduate in USA. Am I eligible to claim AOC for my Master degree which I am doing from a reputed university in USA?

  8. I am a single mother of two young kids ages 7 and 1. I have not worked for 2013 but is enrolled in a masters program. I want to know if I can file taxes and if so will I recieve a refund. Also, I was self employed for the year doing clients hair, does this qualifies me to file a refund and recieve money.

  9. My daughter attended a university and we paid for tuition cash the university sent us a refund on a class that she dropped. They said because of this I don’t qualify for a 1098T. can I still get the American Opportunity Credit and enter tuition paid if I don’t have a 1098t

  10. I am a full-time, independent student and this year I did not work. I just got my 1098 form in the mail. I have a scholarship and also receive grants from financial aid, which some was refunded to me. The income of the refund was not over $10,000 though. Do I need to file and will I get any credits?

  11. i am a single parent and i attend college i am not working but i do have a 1098T can i still file my taxes based only on my educational expenses because i have no income

  12. Have a question regarding AOC. I paid all of my tuition with cash and then got a loan for it. Money were disbursed directly to my school and then refunded to me. Do I need to reduce my “qualifying education expenses” by the refund I got? The total loan amount did not exceed the tuition I paid. Thanks

  13. I was wondering I’m not working but I’m a full time student and i have 3 children and was wondering could i file and would i get taxes back plus I’m a single parent

  14. I was wondering I’m not working but I’m a full time student and i have 3 children and was wondering could i file and would i get taxes back

  15. I also cashed in US Savings Bonds to pay for my daughter’s school. Turbo Tax does tell you during the process of entering US Saving Bond interest income about the educational tax break on that interest and will go through the process of calculating that exemption, but warns that you cannot include expenses also applied to education deductions or credits and that you need to come back and complete this section using any additional expenses after completing the deductions and credits.

    Two issues, first it does not tell you what amount that might be after you complete the education deductions and credits, and does not remind you or take you back to the bond interest section to apply it. Turbo Tax calculated that American Opportunity credit would provide the greatest refund between deductions and Lifetime Learning credits, which are all mutually exclusive and then just moved on forgetting all about the Us Saving Bond interest previously entered.

    I assume that since the American Opportunity only provides credit for up to the first $4000 of expenses, anything beyond that can be applied to the Savings Bond interest tax exemption. The way Turbo Tax goes through the process does not make that clear and gives the impression that the amount reported in 1098-T has to be filed and only applied to one tax savings mechanism (seems to forget all about the previous entered US Savings Bond Interest). Only after reading IRS publication 907 did I find examples of Coordination with the American Opportunity Credit and Coverdell ESA and QTP that show $4,000 applied to the American Opportunity credit subtracted from the total qualified expenses to determine an Adjusted qualified higher education expenses (AQHEE), that I realized I could do the same for the Saving Bond interest tax exemption, adding a couple of thousand to my refund (I had over $6,000 in interest when I cashed them in)! Very dissapointed in Turbo Tax for not doing a better job with this, which caused me a lot of confusion and extra work.

  16. I have a senior in college and I claim him on my taxes and get the opportunity credit. But, we want to find out if it’s better to have him file single on his own in order to qualify for financial aid for grad school? can anyone direct me to some good sites to find out if this is a better solution for financial aid purposes?

    1. As long as your child is under 24 on January 1 of the school year that he/she is in college, the government considers him/her your dependent (even if he/she lives 2000 miles away, has their own apartment/condo, etc …). Unless your child is married or served in the Armed Forces and under the age of 24 they are your independents. This is borne out on the government FAFSA website. If he’s over 24 on January 1, then he can claim him/her self and apply for aid accordingly.

  17. If I did not attend college on 2013 but made school payments to my account totaling $5000 on 2013 can I still get the american opportunity tax credit when I file my taxes.

  18. Can you claim the interest on a student loan you have been paying on that is your ex’s? My husband is required to pay his ex wife’s student loan (according to the divorce agreement) is he able to claim that interest, even though it is in her name?

  19. If I receive grants and student loans in excess of tuition am I able to use this tax credit on the purchase of a laptop for school?

  20. I am a disabled veteran in school 3/4 time I do not work but I have received the 1098 tax form am I able to file for the education benefits even though I do not work?

    1. Hi Nikki,
      Yes you can if you have income and you are filing your tax return. TurboTax will ask you questions specific to your situation so you can easily prepare your taxes.
      Thank you,
      Lisa Greene-Lewis

  21. My wife is a full time student l and receives financial aid. can I claim that on this year’s taxes. Is there anything i can claim

  22. I’m a little confused about how often this credit can be taken. I think it is a limit of 4 tax returns, not 4 school years.

    Assume a student starts in the fall, they would be able to apply only that fall’s credit to the next year’s tax return (filed in the spring). After 4 years of college on a fall/spring school year, that would be 4 tax returns but the student could not claim the credit for the final spring semester of school on the following year’s (the next spring’s) tax return. Is that correct? So it’s really not 4 full years of college (on a continual fall/spring semester schedule), but actually 4 tax returns and you won’t be able to claim any credit for the final semester?

    1. Hi Chris,
      No this is not true. The tax credit is a benefit to help students pay for their education.
      Thank you,
      Lisa Greene-Lewis

  23. I’m using TurboTax2013. I received a 1099-Q for my daughter and entered the distribution & earnings amount. I received the 1098-T from the university and entered the appropriate information. Due to my income, I cannot take any education credits. However, why is TurboTax not allowing the tuition & books/fees to be used as deductions against the 1099-Q form? The qualified education expenses spent (tuition, r&b, books & fees) equals the total distribution from the 1099-Q. Problem is 1099-Q worksheet is only showing the r&b on line 2 of the QTP Computation of Taxable Distribution. How do I get TurboTax to include the tuition & books/fees? Thank you.

  24. When you get a form 1098-T in the mail, can you apply it toward your taxes, even if most of it was paid by a third party? Thank You for your time!

  25. I became a student back in 2010 but never knew i could claim books and school supplies what do i have to do to claim this? Do i have to have reciepts

  26. I go to college which i have to pay a monthly free every month and plus iam a single parent how much can i get back

    1. Hi Kim,
      If you’re referring to education credits, you get them on your tax return when you file your taxes. You should receive a 1098-T, which reports how much was spent on education expenses. TurboTax will ask you simple questions related to you and guide you through preparing your tax return.
      Thank you,
      Lisa Greene-Lewis

  27. I am pursuing a Masters in Leadership in Education degree and have spent almost $4,800 this year. I am a full-time teacher and pursued this in order to become an administrator. What will I be able if any to claim?

  28. Hello,
    I became a full time student with Kaplan University in 2013 and was not working. I am still unemployed but attending classes full time. I was not planning on filing because I did not have employment, but after doing some research here it seems that I can. Am I correct, and if so, how do I begin? thank you for your time and I look forward to hearing back from someone on this issue.

  29. Last year I work part time and I was in school as full time student. I took financial aid $ 5500 but my school fee and tuition was $ 6500 for one semester. I had 3 semester last year , I took $ 4000 loan to pay school fee. Books and other stuff I paid by my pocket . When I claim for America tax credit ,should I add financial aid money or I can only add my loan money. Thanks

  30. I have been working part time all year and have been going to school full time. I’m taking financial aid and taking my max in student loans to help to pay do I include that on my taxes?

    1. Hi Amy,
      If you are paying student loan interest you will be able to deduct that on your taxes as long as no one is claiming you as a dependent. TurboTax will ask you simple questions and guide you through the deductions and credits you’re eligible for.
      Thank you,
      Lisa Greene-Lewis

  31. I have son at home who is 18 and is a full time student. His loans and financial is in his name but he lives under my house he works part time but not sure he has made a enough to file on. Do i came him as a dependent? he does not make enough money to live off of so i support him 100%. Do i clam is school credits as well.

  32. I was in school full time during the 2011 and 2012 tax year but did not work, therefore I did not file any taxes. Is there any way to “back” file to receive the American Opportunity Tax Credit? I didn’t think I could receive any amount since I was not working, but now I am reading that is not the case. Thank you for your help!

  33. Hi! My son is a high school Junior and is taking dual credit classes at the local college. Would our out of pocket tuition and books fees be tax deductible? Thank you!

    1. Hi Eugenia,
      College level classes to improve your skills and books for those classes could qualify for the Lifetime Learning Credit if they are a requirement of the educational institution and the fees are paid directly to the institution.
      Thank you,
      Lisa Greene-Lewis

      1. hello lisa, if my son wanted to get a laptop for medical school could i use the american oppurtunity credit (for example a 1200$ laptop) how would that work? our income is less than 50k as well.

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