College and other forms of higher education can be a major financial investment. Fortunately, students and their families may be eligible for federal tax benefits that can help offset some of the cost. Education tax credits and deductions can reduce the amount of tax you owe or, in some cases, increase your tax refund.
However, not every education expense qualifies, and the rules can vary depending on the credit, the student’s enrollment status, income, and who actually paid the expenses.
Understanding the available tax benefits can help students and their families avoid overlooking valuable savings when filing a federal tax return.
What Are Education Tax Credits?
Education tax credits are tax benefits that can help reduce the amount of federal income tax you owe when you pay qualifying education expenses. Unlike a deduction, which reduces taxable income, a tax credit directly reduces your tax liability.
Two major federal education credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC can provide a credit of up to $2,500 per eligible student for qualifying education expenses. The credit is available for the first four years of higher education when the student meets the applicable requirements.
The Lifetime Learning Credit can provide a credit of up to $2,000 per tax return for qualifying education expenses. Unlike the AOTC, the LLC is not limited to the first four years of postsecondary education and can apply to undergraduate, graduate, professional, and certain job-skills courses.
The two credits have different eligibility requirements, so taxpayers should determine which one provides the greatest benefit based on their circumstances.
American Opportunity Tax Credit
The AOTC is generally available to eligible students pursuing a degree or other recognized educational credential.
The credit is worth 100% of the first $2,000 of qualifying education expenses and 25% of the next $2,000, for a maximum credit of $2,500 per eligible student.
Up to 40% of the AOTC may be refundable. This means an eligible taxpayer could potentially receive up to $1,000 of the credit as a refund even if they do not owe enough federal income tax to use the entire credit.
To qualify, the student generally must be enrolled at least half-time for at least one academic period during the tax year and must be within the first four years of higher education. Income limitations also apply.
Lifetime Learning Credit
The Lifetime Learning Credit provides another option for taxpayers paying qualifying education expenses.
The credit is generally equal to 20% of up to $10,000 in qualifying expenses, making the maximum credit $2,000 per tax return.
Unlike the AOTC, the Lifetime Learning Credit does not have a limit on the number of years it can be claimed. It can potentially benefit students pursuing graduate degrees, professional education, or courses designed to acquire or improve job skills.
The LLC is nonrefundable, meaning it can reduce your tax liability but generally cannot result in a refund if your tax liability is already zero.
Taxpayers cannot claim both the AOTC and LLC for the same student in the same tax year.
What Education Expenses Are Tax Deductible?
Qualifying education expenses depend on the tax benefit being claimed. Generally, expenses such as tuition and required enrollment fees may qualify for certain education tax benefits.
For the AOTC, qualifying expenses can include tuition, required enrollment fees, and course materials such as books, supplies, and equipment needed for a course of study.
For the Lifetime Learning Credit, qualifying expenses generally include tuition and fees required for enrollment or attendance. Books and other materials may qualify only if they must be paid to the institution as a condition of enrollment or attendance.
Other expenses generally do not qualify for these credits. These can include room and board, transportation, insurance, medical expenses, student activity fees, and personal expenses.
The distinction between qualified and nonqualified expenses is important because claiming an expense that does not meet IRS requirements could result in an incorrect tax return.
Who Can Claim an Education Credit?
Whether a student or parent can claim an education credit depends largely on who claims the student as a dependent.
If a student is claimed as a dependent on someone else’s tax return, the person claiming the student may generally claim the education credit if all other requirements are met.
If the student is not claimed as someone else’s dependent, the student may potentially claim the credit on their own tax return.
Both credits phase out between $80,000–$90,000 of modified adjusted gross income for single filers and heads of household, and $160,000–$180,000 for married couples filing jointly. Taxpayers above the upper limit cannot claim either credit.
Students and parents should also be aware that scholarships and grants can affect the amount of expenses available for an education credit. Expenses paid with tax-free educational assistance generally cannot also be used to claim a tax credit.
Can You Deduct Education Expenses From Taxes?
Taxpayers may be able to receive a tax benefit for certain education expenses, but a tax credit is not the same as an education deduction.
The federal tuition and fees deduction is no longer available for tax years after 2020. As a result, taxpayers generally cannot simply deduct college tuition from taxable income on their federal return.
Instead, eligible taxpayers may be able to use education tax credits such as the AOTC or Lifetime Learning Credit.
There are also specific circumstances in which education expenses may be deductible as a business expense. For example, certain work-related education expenses may receive different tax treatment depending on the taxpayer’s circumstances and whether the education maintains or improves skills required for an existing profession.
Taxpayers should carefully review the rules applicable to their particular situation before claiming an education-related deduction.
Other Education-Related Tax Benefits
Education credits are not the only tax benefits that may help students or their families. The student loan interest deduction may allow eligible taxpayers to deduct up to $2,500 of interest paid on qualified student loans. Income limitations apply, and taxpayers generally cannot claim the deduction if they are claimed as a dependent on someone else’s return.
Certain education savings accounts can also provide tax advantages. For example, distributions from a 529 plan can generally be tax-free when used for qualified education expenses.
Some employers may also offer educational assistance programs that allow employees to receive tax-free assistance for qualifying education expenses, subject to applicable limits and requirements.
How to Claim Education Tax Credit
To claim an education credit, taxpayers generally need information about the student’s qualifying expenses and enrollment. Educational institutions typically provide Form 1098-T, Tuition Statement, to eligible students.
Form 1098-T can help taxpayers determine which education expenses may qualify, although the form itself does not necessarily show the exact amount of expenses that can be claimed.
Taxpayers generally claim the AOTC or Lifetime Learning Credit by completing Form 8863, Education Credits, and attaching it to their federal income tax return.
Keep receipts, enrollment records, scholarship information, and other documentation supporting the expenses claimed. Good records can be particularly important if the IRS questions the credit later.
Frequently Asked Questions
What are education tax credits?
Education tax credits are federal tax benefits that can reduce a taxpayer’s tax liability when eligible education expenses are paid. The two primary credits are the American Opportunity Tax Credit and the Lifetime Learning Credit.
What education expenses are tax deductible?
Depending on the applicable tax benefit, qualifying expenses can include tuition, required enrollment fees, and certain books, supplies, or equipment. Room and board, transportation, insurance, and personal expenses generally do not qualify for the major federal education credits.
Who can claim an education credit?
A student may potentially claim an education credit if they are not claimed as a dependent by someone else. If a student is claimed as a dependent, the person claiming the student may generally be eligible to claim the credit, provided all other requirements are met.
Can you deduct education expenses from taxes?
Certain education expenses may qualify for tax credits, but the federal tuition and fees deduction is no longer available for tax years after 2020. Eligible taxpayers may instead qualify for the American Opportunity Tax Credit or Lifetime Learning Credit.
How to claim education tax credit?
Eligible taxpayers generally claim an education credit by completing Form 8863 and including it with their federal income tax return. Taxpayers should keep documentation showing qualifying expenses and any scholarships or grants received.
Conclusion
Education-related tax benefits can provide valuable savings, but the rules surrounding eligibility, qualifying expenses, income limits, and dependency status can be complicated. Making an error on a tax return or claiming a credit incorrectly could potentially result in additional taxes, penalties, or interest.
Optima Tax Relief helps taxpayers understand and address a variety of federal tax issues. If you are dealing with tax debt, IRS collection activity, or questions about your tax obligations, professional guidance can help you understand your options and determine an appropriate path forward.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
