Education Tax Deductions and Credits to Maximize Your Tax Refund

The cost of education keeps going up, with no end in sight.  If you are caught in that vortex, you’ll be happy to know that there are education tax deductions and credits that can help offset the costs of education.

The American Opportunity Credit (an extension of the old Hope Credit) and the Lifetime Learning Credit are education credits you can subtract in full from your federal income tax, reducing your taxes dollar for dollar.

American Opportunity Credit- This credit reduces your taxes by up to $2,500 per student for the education expenses of college students pursuing a degree during their first four years of attendance, as long as they are  enrolled at least half time and don’t have a felony drug conviction.

Costs that qualify for the credit include tuition, fees, books, supplies and necessary equipment.  And if your taxes are less than $2500, you can receive a refund for up to $1,000 of the credit.  If your income exceeds $80,000 ($160,000 on a joint return), the credit will be gradually reduced.  Your income has to be under $90,000 ($180,000 on a joint return) to receive a credit.

Lifetime Learning Credit- You don’t need to be pursuing a degree to qualify for this credit, which can be claimed by anyone who takes a course at a higher education institution. It covers the cost of tuition and books and equipment you are required to buy from the school.

You can claim a credit against your taxes of up to $2,000 a year per tax return, but you won’t receive a refund if the credit is greater than your tax bill. The credit is gradually reduced if your income exceeds $53,000 ($107,000 on a joint return).  At $63,000 ($127,000 on a joint return) the credit is phased out.

There are also deductions that can ease the strain of education costs.

Tuition and Fees Deduction- If your income is too high to claim the Lifetime Learning Credit for yourself and your dependents, you can claim a deduction of up to $4,000 for tuition and fees instead, even if you don’t itemize your deductions.

You are eligible for this deduction if your income is under $80,000 ($160,000 on a joint return).  But you can’t claim both a credit and a deduction for the expenses of the same student in any year.

Student Loan Interest- Interest on student loans can be deducted even if you don’t itemize deductions, up to $2,500 of interest per year. Your income must be $60,000 or less to claim the full deduction ($125,000 on a joint return). And if you cash in US savings bonds to pay for higher education, the interest is tax-free to the extent that you use the bond income for education expenses.

Work-related education- You may be able to claim an itemized deduction for the expenses you pay for your work-related education, if it is needed to maintain or improve your job skills or your employer requires you to obtain the education to keep your job.

But even if the education is required, you can’t claim a  deduction for the cost if it is needed to meet the minimum requirements of your job or qualifies you for a new career.

Scholarships and Fellowships- If you receive a scholarship or are paid a stipend for a fellowship, it will be tax-free if you are a degree candidate and you use the funds to pay for tuition, fees, books, supplies and equipment.

If you attended college there are a lot of options to help you save on your taxes and TurboTax will help you get the education tax deduction or credit you’re eligible for to help you put more money back in your pocket.

Comments (4) Leave your comment

  1. The Turbo-Tax Program is WRONG! It will not allow American Opportunity Tax Credit for my granddaughter, stating the 4 years of credit was already used. She only has used 3 years and is her fourth year of college. Her mother had 1 year of tax credit 4 years ago. The Help Response said only 4 years of either hope or Opportunity for tax credit for a tax payer. This is wrong. According to the IRS, the Opportunity Tax credit 4 year limitation is by student, not taxpayer. This was confirmed by a tax lawyer.

  2. Pingback: TurboTax Education Credits and Deductions Calculator | Tax Break: The TurboTax Blog

  3. With the new on-line donation website for Goodwill, will TurboTax have immediate access during tax preparation as you do with other forms?

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