You may be eligible for educational deductions and tax credits when paying qualified educational expenses – but you’ll have to meet eligibility requirements. This article explains education credits and deductions to help you figure out whether you qualify.
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College is expensive. Luckily, educational tax credits can help you cover the cost of your education by reducing the amount you owe on your taxes. There are two educational tax credits that could potentially help you save: the American Opportunity Tax Credit and the Lifetime Learning Credit.
You can also take advantage of tax deductions to help reduce the cost of your education by lowering taxable income. These deductions include the Student Loan Interest Deduction and the Tuition and Fees Education Tax Deduction.
If you’re still saving up to go to school, you can also make your money go further by saving in a tax-advantaged account such as a 529 Plan or a Coverdell Education Savings Account. Depending on your state, you might be able to get a tax deduction on 529 Plan contributions.
Here’s a breakdown of the educational deductions and credits available so you can find out what type of tax savings you could qualify for.
On this page:
- Who Can Claim an Education Credit?
- Who Can Claim Deductions?
- Education Tax Credits and Deductions
- Tax Advantaged 529 Plans and Coverdell Education Savings Accounts
Who Can Claim an Education Credit?
In order to claim a tax credit for education costs, you must:
- Have qualified educational expenses and be enrolled at an eligible educational institution as defined by IRS guidelines.
- Be a student, the spouse of a student, or a person (such as a parent) who lists the student as a dependent on his or her tax return.
- Not be claimed by your parents as a dependent on their tax return if you’re planning to claim the credit yourself.
- File jointly if you’re married and your spouse is the student.
- Not have already claimed another higher education benefit or credit for the expenses.
Who Can Claim Deductions?
In order to claim a tax deduction for education expenses, you must:
- Have qualified educational expenses, student loan interest, or make contributions to a 529 Plan.
- Have an income below the maximum income limit for each deduction. These income levels can change periodically.
Education Tax Credits and Deductions
Here are some of the key tax credits and deductions you may be able to claim, provided you meet eligibility requirements.
American Opportunity Credit
The American Opportunity Tax Credit allows you to deduct money spent on qualified educational expenses for up to four years of higher education. You can get an annual credit of up to $2,500 per eligible student. You’ll receive a credit for 100% of the first $2,000 in qualified expenses and 25% of the next $2,000 of qualified expenses paid for an eligible student.
The credit is partially refundable – you can get as much as 40% of the credit amount up to a maximum of $1,000 refunded by the IRS if the credit brings your tax liability below zero.
There are income limits if you wish to claim the American Opportunity Tax Credit. To claim the full credit, the IRS requires you have a modified adjusted gross income (MAGI) of $80,000 or less if filing single and $160,000 or less if married filing jointly. You can receive a reduced credit if your MAGI is up to $90,000 or $180,000 if married filing jointly, but you cannot claim it if you make over those amounts.
Lifetime Learning Credit
The Lifetime Learning Credit is a credit you can claim for qualified educational expenses paid for on behalf of student attending an eligible higher education intuition. It’s worth up to $2,000 per tax return and equals up to 20% of the first $10,000 of out-of-pocket expenses.
The credit is available if you pay for undergraduate, graduate, and professional courses or for courses that help you upgrade your job skills. Unlike the American Opportunity tax credit, there is no limit on the number of years you can claim this credit..
There are also income limits for the Lifetime Learning Credit. In 2019, you can claim the full credit if you make a modified adjusted gross income of under $58,000 or $116,000 if you’re married and filing jointly. The credit can be partially claimed if you make up to $68,000 or $136,000 if you’re married and filing jointly. You cannot claim the credit if you make more than those amounts.
You cannot claim both the American Opportunity Tax credit and the Lifetime Learning Tax Credit. You’re likely better off claiming the American Opportunity Tax Credit because it’s more generous. However, if you continue on past four years of study, the Lifetime Learning Credit can come in handy.
Student Loan Interest Deduction
Even if you have already taken advantage of one of the tax credits, you may also be able to take a student loan interest deduction once you graduate and begin paying back your loans. You can deduct the interest you paid via required and voluntarily pre-paid interest payments and can deduct up to $2,500 in interest you pay each year. This is an above-the-line deduction and does not require that you itemize your deductions in order to claim it.
In order to claim the deduction, you must have paid interest on qualified student loans and you must be legally obligated to pay that interest. However, you are not eligible for the credit if you file your taxes as married filing separately or if you’re claimed as a dependent on someone else’s tax return.
Also, for the 2019 tax year, your modified adjusted gross income must be $70,000 or less if filing on your own or $140,000 or less if filing jointly. The deduction is phased out up to incomes of $85,000 or $170,000 if filing jointly.
>> Read More: How Do Student Loans Affect Taxes?
Tuition and Fees Education Tax Deduction
The Tuition and Fees Educational Tax Deduction is no longer available.
Tax Advantaged 529 Plans and Coverdell Education Savings Accounts
If you’re still saving for the costs of your higher education or are saving for a dependent’s higher education, you can use tax advantaged savings plans to help your money grow tax free and reduce your tax burden when you take money out to pay for college.
There are two types of tax advantaged educational savings plans: 529 Plans and Coverdell Education Savings Accounts.
You can contribute money to a 529 Plan that will grow tax free in order to cover the cost of future education.
- In 2019, you can contribute up to $15,000 per person contributing gift tax implications — so grandparents could put in as much as $30,000 combined. Contributions are averaged over five years so you can give larger amounts up front in order to take advantage of compound interest.
- While there are no federal tax breaks for contributing to a 529 Plan, some states offer state tax deductions including Alabama, Arizona, Arkansas, Colorado, Connecticut, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Virginia, Washington DC, West Virginia and Wisconsin. Indiana, Utah and Vermont provide a state income tax credit for contributions.
- Some states only provide a tax deduction if you contribute to their state’s 529 plans, whereas others allow deductions for any contribution
- Once a student is eligible to start taking money out of their 529 Plan, it counts as income on financial aid calculations and could reduce the student’s financial aid amount. However, distributions from the plan are tax free if used for qualified education expenses. If not, there can be a penalty on distributions.
- There are two types of 529 Plans: savings accounts that allow you to spend the money on any schooling you want and pre-paid tuition accounts that allow you to put money aside toward tuition at a state school in the future.
Coverdell Education Savings Accounts:
A Coverdell Education Savings Account is a tax-advantaged investment account that helps you cover educational expenses like tuition, books, and uniforms.
- It allows invested money to grow tax deferred and proceeds can be taken out without owing income tax if used for qualified education expenses.
- With a Coverdell Education Savings Account, you can take out distributions to cover private education for primary and secondary school and not just to pay for college or university.
- Coverdell accounts have lower contribution limits. You can only put in $2,000 per child per year.
- With Coverdell accounts, you can hold your money in almost any investment including stocks, bonds, or mutual funds.
- Coverdell accounts have an age limit and must be disbursed by the time a beneficiary is 30 years old or given to another family member under the age of 30 in order to avoid taxes. 529 Plans have no age limit.
- There are no tax deductions or credits offered for contributing to Coverdell Education Savings Accounts.
There are a number of different options for getting tax credits or deductions to pay for, save for, or repay educational expenses. While not everyone will qualify for each of these credits or deductions, they provide great options for those who are trying to find ways to make going to college more affordable. If you take some time to look into the deductions and credits and see if you qualify for them, you could save a significant amount of money.
If you aren’t familiar with the difference between tax credits and tax deductions, check out our article.
Author: Amanda Reaume