Learn about these higher education tax breaks

Nina Daigle
Nina Daigle

Higher education increasingly means higher costs. Even with skyrocketing tuition, there are some ways to get a break on taxes when shouldering the cost of college.

Below is a summary of some higher education tax credits and deductions that are available for qualified tuition and/or related expenses of the taxpayer, the taxpayer’s spouse or a dependent.

  • American Opportunity Tax Credit

Congress replaced the Hope Scholarship tax credit in 2009, with the more valuable American Opportunity tax credit. The American Opportunity tax credit was scheduled to expire after 2012 but was extended through December 2017 by the American Taxpayer Relief Act of 2012. This is the primary tax credit available for higher education.

The maximum American Opportunity tax credit is $2,500 per student. To qualify for the maximum credit, you must spend at least $4,000 per student per year in his or her first four years of post-high school education.

The money you pay for tuition and related fees counts for calculating the tax credit, along with outlays for necessary books, supplies, and equipment. Room and board costs, though, do not count. The student must be enrolled at least half-time for at least one academic period that begins during the taxable year.

The credit is per student per year. In other words, a family may have more than one eligible student in a year. This offsets both regular tax and Alternative Minimum Tax (AMT).

Take, for example, a couple that has a son who is a sophomore in college this year and a daughter who is a college senior. They will spend $12,000 on each student’s qualifying expenses in 2016. Thus, they can claim two American Opportunity credits of $2,500 each, for a total of $5,000.

High-income taxpayers may not benefit from the American Opportunity tax credit. To get the full credit, a taxpayer’s Modified Adjusted Gross Income (MAGI) cannot be more than $80,000 for single taxpayers or $160,000 for those married filing a joint return. The American Opportunity tax credit phases out with MAGI between $80,000 and $90,000 (single) or $160,000 and $180,000 (MFJ). For eligible taxpayers, the American Opportunity credit is 40% refundable.

  • Lifetime Learning Tax Credit

The Lifetime Learning Credit is a nonrefundable tax credit equal to 20 percent of up to $10,000 of qualified tuition and fees paid during the tax year. The maximum credit available is $2,000. This credit is per taxpayer not per student. Consequently, a family’s maximum credit is the same even if they have multiple eligible students.

For some, the Lifetime Learning credit may be the only education-related tax credit available. The American Opportunity tax credit can only be used during a student’s first four years of post-high school education and only if that student is pursuing an undergraduate degree or a similar credential.

The Lifetime Learning credit can be used when other expenses are incurred at any time, such those relating to graduate school or undergraduate school, professional degrees or career advancement courses.

There is no limit on the number of years the Lifetime Learning credit can be claimed for each student. A taxpayer cannot take an American Opportunity credit and a Lifetime Learning credit for the same child in the same year; however, it’s possible to take an American Opportunity credit for one child and a Lifetime Learning credit for another child on the same tax return.

The Lifetime Learning tax credit also has income limitations. To get the full credit, a taxpayer’s MAGI cannot be more than $55,000 (single) or $110,000 (married filing jointly). The Lifetime Learning credit phases out with MAGI between $55,000 and $65,000 (single) and $110,000 and $130,000 (MFJ).

  • Tuition and Fees Deduction

For most taxpayers, the tuition and fees deduction will be a third option. However, if either of the tax credits, the American Opportunity or Lifetime Learning tax credit is claimed, the tuition and fees deduction cannot be taken. The maximum deduction for the tuition and fees deduction is $4,000. Qualified education expenses are tuition, fees, books, supplies and other related expenses required for enrollment or attendance at an eligible educational institution. The tuition and fees deduction is claimed as an adjustment (reduction) to income on the taxpayer’s individual tax return. No tuition and fees deduction is allowed, however, if a taxpayer’s MAGI is higher than $80,000 (single) or $160,000 (MFJ).

Generally, taxpayers will claim this deduction only when they do not qualify for either of the education tax credits. The tuition and fees deduction was extended by the 2015 Path Act through Dec. 31, 2016.

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