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

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.

172 responses to “Back to School: Education Tax Credits and Deductions Help You Save at Tax-Time”

1. 

   My husband is in photography school. He is required to make equipment purchases for his classes (like light meters, umbrellas, light stands, flash), but he will be able to use these when he starts up his photography business after he graduates. Some equipment he can rent from the school. Can he deduct these expenses as education expenses?

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     Maybe, who knows.

     Reply