Are you buckling under the burden of tuition costs? Higher education opens up a lot of opportunities, but it also takes a toll on your savings. Fortunately, there are tax credits designed to lighten the load of education expenses. This complete guide to education tax credits will show you how to make the most out of your tax season.
What education tax credits are available in 2020?
There are three education tax credits available this tax season. These are the Tuition and Fees Deduction, the American Opportunity Credit, and the Lifetime Learning Credit.
|Education Tax Credit/Deduction||Maximum Credit/Deduction||Maximum Modified Adjusted Gross Income to Qualify|
|The Tuition and Fees Deduction||$4,000||$80K or $160K for married joint-filers|
|The American Opportunity Tax Credit||$2,500||$68K or $136K for married filing jointly|
|The Lifetime Learning Credit||$2,000||$67K or $134K for married filing jointly|
As you learn the details of these tax credits, keep in mind that you can only claim one of them per student, per year. To apply for either, simply fill out Form 8863 and attach it to your Form 1040 or 1040A.
Let’s dig a little deeper into each of the above.
The Tuition and Fees Deduction
The Tuition and Fees deduction was discontinued after 2017, but was retroactively extended on December 20, 2020, when the president signed the Taxpayer Certainty and Disaster Tax Relief Act.
How much is it worth?
This deduction allows you to claim up to $4,000 in qualified college expenses.
Who qualifies for the Tuition and Fees deductions?
Only taxpayers with a modified adjusted gross income (MAGI) below $65K ($130k for married taxpayers filing jointly) qualify for the full $4,000 deduction. If your modified adjusted gross income is between $65K and $80K ($130K and $160K for married joint-filers), you can deduct up to $2,000.
Remember that you can’t claim for the Tuition and Fees deduction and an education tax credit for the same student in the same year. You can calculate which option provides the largest tax break using a tax preparation program or by asking a tax professional.
The American Opportunity Tax Credit
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit (AOTC) helps to cover qualified educational expenses paid for by eligible students. These expenses include tuition, student activity fees, books, supplies, and equipment necessary for the course of study. However, you can only claim the AOTC for the first four years of higher education.
Additionally, not all education-related expenses qualify for the AOTC. The following expenses are not eligible for this tax credit:
- Room and board.
- Student health fees.
- Transportation costs to get to school.
- Personal living expenses while attending school.
- Expenses for sports, games, hobbies, or other non-credit school courses.
If you’re covering tuition for multiple dependent students, you can claim the AOTC once for each of them.
How much is it worth?
You can claim 100% of your first $2,000 in eligible expenses and 25% of the next $2,000. As such, the maximum credit amount that you can receive is $2,500. Also, 40% of the credit is refundable (for up to $1,000).
Who qualifies for the American Opportunity Tax Credit?
You can claim the AOTC if you:
- Pay for tuition for your higher education.
- Cover tuition (or other qualifying expenses) on behalf of an eligible student, who may be your spouse or your dependent.
- Include the name and taxpayer identification number of the eligible student on your tax return.
- Have a modified adjusted gross income (AGI) under $68,000 if you are single, and $136,000 if married filing jointly.
- Aren’t listed as a dependent on someone else’s tax return.
- If married, your filing status is “married filing jointly.”
To be considered an “eligible student,” the following must be true:
- You were enrolled in an educational program for at least one academic period during the applicable tax year.
- You’ve carried at least half of the normal full-time workload during your course of study.
- You haven’t completed the first four years of higher education before the start of the tax year.
- As of the end of the tax year, you don’t have any felony convictions for possessing or distributing a controlled substance.
For more eligibility information, click here.
The Lifetime Learning Credit
What is it the Lifetime Learning Credit?
The Lifetime Learning Credit (LLC) also covers qualifying educational expenses. Unlike the AOTC, you can claim this credit indefinitely — it doesn’t cut off after four years. However, you can only claim it once per tax return.
Also, unlike the AOTC, in addition to the above qualifying expenses, students can claim expenses for sports, games, hobbies, or non-credit courses. However, they can only do so if these expenses help the student acquire or improve job skills.
If you’re covering tuition for multiple dependent students, you can only claim the LLC for one of them per tax year.
How much is it worth?
This credit covers 20% of your first $10,000 in eligible expenses. As such, the maximum credit amount is $2,000. Of course, if you spent less than $10,000, the credit you receive will be smaller.
Unlike the AOTC, the Lifetime Learning Credit is not refundable.
Who qualifies for the Lifetime Learning Credit?
The Lifetime Learning Credit is easier to qualify for than the American Opportunity Credit. Unlike the AOTC, the eligible student doesn’t need to be pursuing any degree or certificate, and they can be either an undergraduate or graduate student. Further, you can continue to claim the LLC even after completing more than four years of college credits.
Which education tax credit should I claim?
You can only claim one education tax credit per student per year. As such, if you qualify for both, you’ll need to choose the one that will save you more money.
In most cases, the American Opportunity Tax Credit will save you the most money. It covers 100% of the first $2,000 you spend, so you don’t have to spend a full $10,000 to get the full credit. Plus, unlike the LLC, it’s partially refundable.
Are there any other ways to save money on educational expenses?
In addition to these two tax credits, students who took out loans to cover their educational expenses can also claim the student loan interest deduction.
To qualify, you must have been enrolled in a degree or certification program at least half-time in the past tax year. The loan must be in your spouse’s name, and you must have used it exclusively for qualified education expenses. Further, your modified AGI must be smaller than $80,000 (or $165,000 if married and filing jointly).
This deduction can reduce your taxable income by up to $2,500.
To apply for either tax credit, fill out Form 8863 and attach it to your Form 1040 or 1040A.
If you’re overwhelmed by the process, don’t worry. You can always ask for help. Click here to browse top-rated tax preparation solutions, which can make your tax season easy, stress-free, and maybe even profitable.