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Education Tax Credits You Can Earn
By
Gabriel Jimenez-Ekman
Gabriel Jimenez-Ekman is a content editor and writer at Scholarships360. He has managed communications and written content for a diverse array of organizations, including a farmer’s market, a concert venue, a student farm, an environmental NGO, and a PR agency. Gabriel graduated from Kenyon College with a degree in sociology.
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Cait Williams is a Content Writer at Scholarships360. Cait recently graduated from Ohio University with a degree in Journalism and Strategic Communications. During her time at OU, was active in the outdoor recreation community.
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Annie has spent the past 18+ years educating students about college admissions opportunities and coaching them through building a financial aid package. She has worked in college access and college admissions for the Tennessee Higher Education Commission/Tennessee Student Assistance Corporation, Middle Tennessee State University, and Austin Peay State University.
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Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania.
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Education tax credits offer much-needed financial relief for families who are paying educational expenses. Opportunities such as the Lifetime Learning Credit, the American Opportunity Credit, and the Tuition and Fees Deduction can save families thousands of dollars. But the first steps to taking advantage of these opportunities is knowing that they exist and learning how they work!
Because families can only claim one of these credits per year, it’s important to choose the most beneficial option. So, let’s go over the rules and benefits of each education tax credit together!
Tax deductions versus credits
In order to determine which credit to claim, it’s important to first have a thorough understanding of how tax deductions work. Deductions allow you to deduct a sum from your taxable income. In other words, you will be exempt from paying income taxes on the sum that you deduct.
Deductions
For example, let’s say that you deduct $2,000 from your federal taxes. If you were taxed 10% on that income, you would receive that 10% back. That’s $200 saved from your education tax credit. So, in order to find the best education tax credit, find the one that gets you the highest deduction. And remember – if your educational expenses were less than the maximum deduction, you cannot claim the entire sum.
Credits
Tax credits are a bit simpler. If you claim a tax credit, you will receive the entire sum of that credit. It will either be used to reduce the taxes you owe, or sent to you as a refund. However, some credits are non-refundable. This means that you can only claim them if you owe taxes. If you don’t, you will not receive the money as a payment from the IRS.
Learn more: Are work study earnings taxed?
Can you use tax credits for loans?
It’s a common misconception that you cannot claim educational tax credits for student loans. If you take out student loans, you can claim a credit or deduction on that sum. So, even if you did not pay $4,000 out of pocket towards tuition, you can claim $4,000 for credits.
Education tax credits can come in handy when you are paying back loans as well. Many students can deduct student loan interest payments from their taxable income. If you paid over $600 in interest that year, your servicer will send you the necessary tax form. This form is the 1098-E. However, you are eligible for the deduction even if you didn’t pay $600. You’ll just have to reach out to your servicer for a copy of the form.
Related: Navigating different types of student loans
Lifetime learning credit
Who qualifies?
The Lifetime Learning Credit is the most flexible education tax credit in its definition of educational expenses when compared to the American Opportunity Tax Credit (AOTC). Expenses are not limited to undergraduate students as expenses towards graduate school, trade school, and non-degree educational programs are all eligible. Tuition, fees, books, and course materials can all be deducted under the credit.
However, there are income-based limits on who can claim the Lifetime Learning Credit. Your modified adjusted gross income, or MAGI, must be below $80,000 for the year in order to receive the full tax credit. This limit is increased to $160,000 per year for couples who file jointly.
Also see: Which 529 plan assets are reported on the FAFSA?
What is the maximum credit?
The Lifetime Learning Credit can be used to claim 20% of up to $10,000 in educational expenses. This means that you can receive up to $2,000 per year. However, if your MAGI is over $80,000, your maximum deduction will decrease. The closer you get to the limit of $90,000, the less you will be able to deduct. This is increased to $160,000 and $180,000 for those filing a joint return.
Is it refundable?
No, the Lifetime Learning Credit is not refundable. As a result, you can only use the credit to reduce the amount you owe. If you don’t owe anything, you cannot get it back as a refund.
American Opportunity Credit
Who qualifies?
Anyone with a qualifying MAGI who paid for undergraduate education expenses during the tax year can claim this credit. You must have a MAGI below $90,000 (or $180,000 if filing jointly with a spouse) to qualify. You’ll only be able to claim this credit for up to four years per student. But if you have multiple undergraduate students at once, you can claim it for each of them.
What is the maximum credit?
You can claim up to $2,500 per year with this credit. However, there is a caveat for claims over $2,000. Taxpayers can claim the entirety of their first $2,000 in expenses, but only 25% of the next $2,000. So, if you only paid $3,000 total that year, you would only receive a $2,250 refund. That’s the entirety of the first $2,000 plus 25% of the next $1,000.
Additionally, eligibility for the credit begins to phase out if your MAGI is $80,000 or above (or $160,000 for couples filing jointly). If your MAGI is above $80,000, your maximum credit will begin to decline. The closer your MAGI gets to $90,000, the closer your maximum credit will get to $0.
Is it refundable?
Yes, the American Opportunity Credit is refundable. As a result, you can receive up to 40% of its value as a tax refund. This would occur if you didn’t owe taxes at the end of the year.
Tuition and Fees Deduction
Frequently changing…
The Tuition and Fees Deduction has a long history of being discontinued, restarted, and modified. It most recently expired at the end of 2020. As of March 2023, it is still suspended. However, taxpayers can apply it retroactively to past years’ taxes. So, if this is the best fit for you, you can utilize it on taxes as far back as 2017. For those who have 529 college savings plans, this might be applicable to you more than anyone else.
The deduction commonly goes through modifications when it is reinstated. As a result, it may not look the same when and if it is reissued. In order to give you a picture how the deduction works, here are the details from its last iteration:
Who qualifies?
Anyone who paid educational expenses with a MAGI below $65,000 qualified in 2020.
What is the maximum deduction for the Tuition and Fees Deduction?
In 2020, the Tuition and Fees Deduction had a maximum deduction of $4,000. It’s important to remember this is a deduction and not a credit. So, people were exempt from income tax up to $4,000 in income. They did not receive a $4,000 credit.
Forms to look out for
The most important form for claiming education tax credits is the 1098-T. This tax form is typically distributed in January and shows all the educational expenses paid to the school.
If you are claiming credits for textbooks and other course materials, you’ll need your receipts. If you want to deduct student loan interest payments, you’ll also utilize the 1098-E. Your servicer will send this to you if your payments exceed $600. If they did not, you will have to request it.
Final thoughts
Now that you have information about each tax credit, it’s time to examine your financial situation. Let’s start with some basic questions to start:
Questions To Consider
- What is your Modified Adjusted Gross Income (MAGI)?
- What credits or deductions does your MAGI qualify you for?
- Which credit or deduction is most financially beneficial for you?
Questions To Consider
- What is your Modified Adjusted Gross Income (MAGI)?
- What credits or deductions does your MAGI qualify you for?
- Which credit or deduction is most financially beneficial for you?
Let’s look at an example. Assume someone has a MAGI of $82,000. They would qualify for the entire American Opportunity Credit or they would qualify for a partial Lifetime Learning Credit since $82,000 is in the phase-out range.
Next, look at the type of educational expenses you have. Not all educational expenses receive the same coverage. For example, undergraduate tuition payments would qualify for any of the credits, but graduate school tuition payments would only qualify you for the American Opportunity Credit.
The next step is to gather the forms from your school and/or loan servicer. You’ll need the information on these forms to claim your credit come tax time. If this all still feels confusing, that’s okay, but don’t let it discourage you. Take it one form at a time and check back here when you need to!
Related: How much is the 529 tax deduction worth?
Frequently asked questions about education tax credits
Is the tuition and fees deduction available for 2023?
What is the 2023 standard deduction?
