Education tax breaks can help you pay for the cost of higher education. Credits are great because they are dollar for dollar reductions in your taxes while deductions reduce your income subject to tax. The applicable rules vary from credit to deduction and one size doesn’t fit all. Here’s what you need to know:
The Lifetime Learning Credit (LLC) offers up to $2,000 for qualified education expenses paid for all eligible students per return. In other words, the LLC is limited by return, not by student.
- The amount of the credit is figured by calculating 20% of the first $10,000 of qualified education expenses – up to a maximum of $2,000 per taxpayer.
- For purposes of the LLC, qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), transportation, room and board, and similar personal expenses – even if the payment of these expenses are a condition of enrollment or attendance. Qualified expenses do include tuition and fees required for enrollment. This includes amounts you were required to pay to the institution for course-related books, supplies, and equipment. Equipment may include a computer and other technology-related accessories if those are needed as a condition of enrollment or attendance at the educational institution.
- For the 2015 tax year, the credit begins to phase out when modified adjusted gross income (MAGI) hits $55,000 and is phased out completely at $65,000 for taxpayers filing as single, head of household, or qualifying widower and $110,000 to $130,000 for married taxpayers filing jointly. Regardless of your income, you are not eligible to claim the credit if you file as married filing separate. Unlike the American Opportunity Credit (AOC), the LLC is not refundable which means that if your credit exceeds your tax, you won’t receive a refund of the difference.
- You cannot claim the LLC if someone else claims you as a dependent on his or her tax return.
- There is no limit on the number of years you can claim the LLC for each student. This makes the credit particularly attractive if you’re a graduate student or taking only a few classes.
- With the LLC, you don’t need to be pursuing a degree or other recognized education credential. So those extra biology classes that you’re taking? The ones that you signed up for just to see if you want to go to medical school? They would count. And, for the LLC, expenses for sports, games, hobbies, or non-credit courses qualify if it helps you acquire or improve job skills (this is not true for the AOC).
- Here’s some more good news: that felony drug conviction? The one you didn’t want to tell your mom about? It doesn’t count against you for purposes of the LLC. It would, however, stand in the way of your claiming the AOC.
The American Opportunity Credit (AOC) offers up to $2,500 for each qualifying student on your federal income tax return. Unlike the LLC, that means you can claim the AOC for each qualifying student on your federal income tax return.
- A qualifying student is a student who was, for the tax year, enrolled at least half-time in a college program leading toward a degree, certificate, or other recognized educational credential for at least one academic period and has not completed the first four years of post-secondary (college) education at the beginning of the tax year.
- You don’t qualify if you’ve claimed the Hope or AOC for more than four years (unlike the LLC, as noted above) or if you were convicted of a federal or state felony drug offense.
- The AOC is calculated by adding 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000 of qualified education expenses to a maximum of $2,500.
- As with the LLC, qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), transportation, room and board, and similar personal expenses – even if the payment of these expenses are a condition of enrollment or attendance. Also, as with the LLC, qualified expenses include tuition and fees required for enrollment. However, when it comes to the AOC, you can also include expenses for books, supplies, and equipment needed for a course of study – even those expenses are not paid to the school.
- Forty percent (40%) of the AOC may be refundable which means that if the refundable portion of your credit is more than your tax, the excess (up to $1,000) will be refunded to you – even if you owe zero tax.
- Like the LLC, phaseouts apply to the AOC. The amount of your AOC begins to phase out when your MAGI hits $80,000 and is phased out completely at $90,000 for taxpayers filing as single, head of household, or qualifying widower and $160,000 to $180,000 for married taxpayers filing jointly.
- Regardless of your income, you are not eligible to claim the credit if you file as married filing separate.
You can use money that you borrow to pay for school in order to calculate your education credits but you cannot claim the credit based on expenses paid with tax-free scholarship, fellowship or grant money, a Coverdell account, tax-free savings bond interest, or employer-provided education assistance. You must reduce the amount of expenses paid with tax-free grants, scholarships and fellowships, and other tax-free education help.
Qualified education expenses used to calculate credits must be paid by you or your spouse if you file a joint return; a student you claim as a dependent on your return, or a third party including relatives or friends. But, once more with feeling: you can’t claim education expenses if someone else claims you as a dependent on his or her tax return.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. The great thing about the tuition and fees deduction is that it’s an adjustment to income (sometimes called an “above the line” deduction) which means that you don’t have to itemize your deductions on Schedule A to take advantage of the deduction.
- Phaseouts apply to the tuition and fees deduction. The amount of your deduction begins to phase out when your MAGI hits $65,000 and is phased out completely at $80,000 for taxpayers filing as single, head of household, or qualifying widower and $130,000 to $160,000 for married taxpayers filing jointly. To calculate MAGI for the tuition and fees deduction, figure MAGI without regard to the deductions found on line 34 (tuition and fees) or line 35 (domestic production activities deduction).
- Regardless of your income, you are not eligible to claim the credit if you file as married filing separate.
For a quick comparison of the AOC, LLC and tuition and fees deduction, check out this handy-dandy chart:
In most (but not all) circumstances, credits are more tax-favorable than deductions. Compare the tuition and fees deduction to the AOC and the LLC to see what works best for you. You can claim all three on the same return but not for the same student or the same expenses. It’s an either/or: there’s no double (or triple) dipping!
