Back-to-School: Education Tax Benefits to Offset Education Costs


College is expensive. With student loans rivaling mortgages and other debt for most young professionals, it’s easy to see why it’s a big subject of discussion. Tuition, fees, books, housing, food, and the costs of attending universities are on the rise. My own alma mater, Carnegie Mellon University, was “only” $30,000 when I enrolled in 1998, a princy sum even back then (generous grants and student loans helped a lot). Today, it costs over $60,000 a year! That’s insanity.

Education Expenses
Education Expenses

If you are looking for a way to offset some of your education costs, the government offers some tax credits and deductions designed to help students and their parents. While these tax breaks won’t completely cover the cost college, they can reduce some of the pain involved.

American Opportunity Tax Credit

The American Opportunity Tax Credit is offered to students who pay qualified tuition (and aren’t claimed as dependents elsewhere), as well as to parents who pay expenses for their dependent students or themselves. Replacing the Hope Credit, the American Opportunity Credit offers some modified rules, which make it available to more students. Normally, the Hope Credit only allowed you to use it on the first two years of post-secondary education, and the modification allows for up to four years, as well as raising the income limits, and expanding qualified expenses.

The popular American Opportunity Credit was set to expire at the end of 2010. However, it has been extended through the end of 2012. This tax credit allows you to claim up to $2,500 per student. The full credit is available for individuals with a MAGI(Modified Adjusted Gross Income) of $80,000 or less, $160,000 for married filing jointly. It is 40% refundable, meaning that you can get up to $1,000 back even if you don’t owe taxes.

Lifetime Learning Credit

Rather than limiting your ability to get tax credits for education expenses for the first four years of college, it’s possible to use the Lifetime Learning Credit to offset your expenses even in graduate or professional school. As long as the educational institution is qualified, undergraduate or beyond, you can qualify for up to $2,000 in tax credits for your expenses. It’s figured on 20% of your tuition and fees, up to the first $10,000. There is a phase out as you reach certain income levels. Parents can claim this for dependent students.

Deduction for Tuition and Fees

Unlike the credits, which are dollar for dollar reductions in how much tax you owe, deductions reduce your income. You still receive a benefit; it just isn’t as pronounced. You can take a deduction for up to $4,000 spent on college tuition, and on related expenses.

Limitations to These Tax Breaks

Realize that there are limitations to the tax breaks you can take. If you claim the Tuition and Fees Deduction, you can’t take any of the credits. Additionally, you can’t claim the American Opportunity and Lifetime Learning credits for the same student in the same year. If you are a parent with multiple dependent students, you can spread these credits around a little bit to maximize your return.

Carefully consider your tax situation as you decide what is best. Remember that a credit is far more valuable than a deduction. For example, a $2,000 tax credit means a direct $2,000 reduction in tax liability. A deduction reduces your taxable income, so assuming you are in the 25% tax bracket, you would need a $8,000 deduction to get the same reduction in liability as a $2,000 tax credit.

Finally, don’t worry about figuring out which education credit or deduction to take.  TurboTax easily chooses the best option for you depending on your eligibility.

Comments (9) Leave your comment

  1. If my student loans were only used for part of my tuition and I paid for the remainder myself, my 1098-T form does not cover that. Should I add the remainder of the tuition under “books and materials”? Or should I fill out a 8863 form to get credit for it? Do I need/Should I include this additional amount anywhere in my taxes (its about $900)? Thank you!

    1. Hi Glenn,
      You can claim education expenses you paid in 2014 on your 2014 taxes up to the deadline or when you file.
      Thank you,
      Lisa Greene-Lewis

  2. My daughter attends high school tuitition 7,778.88 per year plus 300 informs plus 200.00 books plus cash donations of 450.00. Can I claim this information. thx. irene

  3. My husband is paying for his daughters college. She lives with her mother. Can we still claim the college tuition & expenses on OUR income tax return?

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