For people without wealthy parents or a full-ride scholarship, paying for a college education is often a financial challenge. According to The College Board, for the 2019 to 2020 school year, the average annual cost of tuition and fees at a public, four-year in-state university is $10,560. At a private university, that figure jumps to $37,650. College seniors who borrowed money to cover those costs now graduate with an average of $28,950 in student loan debt.
Tuition costs are high, and increases seem inevitable, but there are ways to alleviate the financial burden. The federal tax code currently offers several tax credits and deductions that can help you recoup some of that cash at tax time.
Here’s everything you need to know about education-related tax deductions and credits for college tuition and expenses. For help with other issues, check out our complete tax guide. If you’re ready to complete your tax return, make sure you work with an experienced company like H&R Block who can help you get the largest return possible.
Education Tax Credits
Tax credits are a dollar-for-dollar reduction in the amount of tax you owe. The following two tax credits are applicable to higher education expenses. One of them is even refundable, meaning that if it reduces your tax bill to zero, you can receive a refund over and above the amount of tax you paid in for the year.
1. American Opportunity Tax Credit
Up to $2,500 tax credit with up to $1,000 refundable. Can only be used for the first four years of undergraduate education.
To claim the American Opportunity Tax Credit (AOTC), you must have paid qualified education expenses for either yourself, your spouse, or one of your dependents at an eligible post-secondary institution for the first four years of post-secondary studies. Expenses include tuition, fees, college textbooks, and other required class supplies.
The AOTC is a dollar-for-dollar credit for the first $2,000 of eligible expenses. After that, you can recoup 25% of the next $2,000 in eligible expenses, up to a maximum total credit of $2,500. If the credit reduces your tax liability to zero, you can receive a refund of up to $1,000.
Here are the major rules to keep in mind:
- Frequency. You can claim the AOTC once per student, per year. So if you have multiple eligible students, you can claim the credit for each of them during the same year.
- Income Eligibility. To be eligible for the full credit, your modified adjusted gross income (MAGI) must be less than $80,000 if filing as single or head of household, or $160,000 or less if married filing jointly. Over those amounts, the amount of the credit you can claim begins to phase out. Taxpayers whose income exceeds $90,000 ($180,000 if married filing jointly) are not eligible for the credit at all.
- Exceptions. You cannot claim this credit if you’re married and file a return separately from your spouse.
- Refund. If you’re due a refund, up to 40% of this credit is refundable, for a maximum refund of $1,000.
- Enrollment Requirements. The student for whom you’re claiming the credit must be enrolled at least half-time and have no felony drug convictions.
- Calculations. The deduction is limited to expenses paid for the current year’s academic periods or an academic period that starts within the first three months of the following year. In other words, you can’t prepay tuition for the next several years to claim a larger credit. If, for example, you paid expenses in December 2020 for classes that begin in January 2021, those expenses would be eligible for the credit. However, if you paid expenses in December 2020 for classes that start in May 2021, you cannot claim the AOTC for those expenses until the 2021 tax year.
2. Lifetime Learning Credit
Up to $2,000 tax credit per tax return, non-refundable. Can be claimed for an unlimited number of years.
The Lifetime Learning Credit allows you to get a tax credit for tuition, fees, and required books and supplies for classes taken at any qualified educational institution. Unlike the AOTC, there is no limit on the number of years you can take this credit, the student doesn’t have to be working toward a degree program, and they don’t have to be enrolled at least half-time to qualify.
You can claim the credit for expenses paid for yourself, your spouse, or your dependents as long as you must pay those expenses to the educational institution as a condition of enrollment or attendance.
Here are the primary rules to keep in mind:
- Refundability. The Lifetime Learning Credit is not refundable. If the credit brings your tax bill below zero, you cannot get a refund in excess of the tax you’d paid in.
- Qualifying Expenses. The $2,000 maximum benefit covers qualifying expenses paid for yourself, your spouse, and your dependents. It’s based on the expenses incurred regardless of the number of students in your household. If more than one person is taking classes, you may get more benefit from the AOTC, which you can claim on a per-student basis. The amounts paid must apply to that year’s academic periods or a period started within the first three months of the following year.
- Limitations. You cannot claim both the AOTC and the Lifetime Learning Credit for the same student. However, if two members of your household have qualifying education expenses, you may claim the AOTC for one student and the Lifetime Learning Credit for the other. The credit starts to phase out if your MAGI is between $59,000 and $68,000 ($118,000 and $136,000 for married couples filing jointly). Beyond those upper limits, no credit is available. You cannot claim this credit if you file as married filing separately.
Tax Deductions for College Expenses
Tax deductions reduce your taxable income. The actual tax savings depends on your tax bracket. For example, for a person in the 24% income tax bracket, a $1,000 tax deduction would lower their tax bill by approximately $240, or 24% of $1,000. Here are two tax deductions applicable to college expenses.
3. Student Loan Interest Deduction
Up to $2,500 tax deduction per return.
The student loan interest deduction allows you to deduct up to $2,500 for interest that you paid during the year on qualifying student loans. You do not need to itemize to claim this deduction; it is an “Adjustment to Income” on Schedule 1 of Form 1040.
You can deduct interest on qualifying educational loans taken out on behalf of yourself, your spouse, or your dependents. However, you must be legally obligated to repay the loan to take the deduction. If a generous family member repays your student loan but is not legally obligated to repay it, you get the deduction, not your family member.
Furthermore, you’re not eligible to deduct student loan interest if someone else claims you as a dependent on their return. For example, if you claim your child as a dependent and your child is the one making payments on the student loan, neither one of you can take the deduction. Your child is obligated to repay the loan but is your dependent, so they can’t claim the interest deduction; you are not obligated to repay the loan, so you can’t claim the deduction.
There are several other rules to keep in mind:
- Income Limits. This deduction phases out if your MAGI is over $70,000 ($140,000 for married couples filing jointly). There is no deduction for taxpayers with MAGI above $85,000 ($170,000 if married filing jointly).
- Restrictions. You can’t deduct interest on a loan made to you by a relative or your employer. The loan must have been used to pay for tuition, fees, books, or housing expenses. Housing expenses qualify only up to the actual cost of housing and meals at the university, or an amount determined by the educational institution and included in the federal financial aid determination. If you take out extra loans to cover more expensive housing than the university’s stated housing allowance, those excess amounts are not qualifying expenses, and you cannot claim the interest on them.
- Institution’s Eligibility. An institution’s eligibility is determined at the time the loans are taken out. If the institution subsequently loses eligibility, that doesn’t affect whether you can deduct your loan interest. Eligible educational institutions are generally accredited, public, nonprofit, or private colleges, universities, vocational schools, or other postsecondary educational institutions that are eligible to participate in a student aid program administered by the U.S. Department of Education.
- Other Qualifying Expenses. You can also deduct loan origination fees at the time the loan was made, and you can deduct credit card interest if the credit card is used solely for eligible academic expenses. You cannot deduct student loan interest if your filing status is married filing separately.
Even though this is a nice tax credit to have it’s important to understand your entire financial situation. If refinancing your student loans from a company like SoFi will reduce your interest payable, it’s almost always going to be worth giving up a portion of this credit.
Employment-Related Deductions
Some education-related tax breaks have to do with what you do for a living or whether your employer covers educational expenses as a perk of being employed there. Here’s a look at the educational tax breaks that have to do with your employment.
4. Educator Expense Deduction
If you are a K-12 teacher, instructor, counselor, principal or aide for at least 900 hours in a school year at a school that provides elementary or secondary education, you may qualify for an Adjustment to Income on Schedule 1 of Form 1040, Line 10.
Eligible educational expenses are unreimbursed expenses for:
- Professional development, books, and supplies
- Computer equipment and related software or services
- Other equipment and supplemental materials for the classroom
The maximum amount of the deduction is $250 ($500 if married filing jointly, but no more than $250 per spouse if both are K-12 educators). For further limitations on this deduction, see IRS Tax Topic 458.
5. Employer-Provided Educational Assistance
Before the Tax Cuts & Jobs Act of 2017 (TCJA), if an employee paid for work-related educational expenses, they might be able to deduct those expenses as a miscellaneous itemized deduction. The TCJA eliminated most miscellaneous itemized deductions, so that deduction is no longer available. However, you may still receive a tax break if your employer offers educational benefits.
Employers can create an educational assistance program (EAP), a written plan designed to benefit the company’s employees. Under the plan, the company can provide up to $5,250 of educational assistance to an employee and exclude that assistance from the employee’s taxable income.
For example, suppose you’re taking courses for an MBA program that will benefit you at work. Your employer may cover up to $5,250 of the cost of the MBA program each year. They can claim a deduction for those expenses, but you don’t have to report that $5,250 as taxable income.
Final Word
It’s important to understand that you can’t use the same expense to claim different credits or deductions. For example, you can’t claim the Lifetime Learning Credit and the AOTC for the same expenses. However, you can take the student loan interest deduction and an education credit during the same tax year if you paid eligible education expenses as well as interest on a qualifying student loan. Talk to an experienced tax preparer, such as those from H&R Block, if you need help maximizing your tax breaks for education expenses.
