Making Sense of Education Tax Credits and Deductions

Education Tax Credits and DeductionsIt’s tax season, and that rhythmic thumping you hear is the sound of filers all across America banging their heads against their desks.

One of the many maddeningly complicated decisions facing taxpayers is how to claim a deduction or credit for tuition payments made last year. Here is the breakdown of the available options:

1. Tuition and Fees Deduction

This is what most taxpayers will qualify for. You are allowed to deduct up to $4000 of qualified education expenses to an accredited school from your income. The expenses that are qualified include tuition, and any fees that are required as a condition of enrollment.

For example, if students are all required to pay an activity fee, that is a qualified expense. But since students do not have to buy textbooks from the university, textbook costs are not a qualified expense.

To be eligible for this deduction, you, your spouse, or your dependent must have been a student at a qualified school last year and you must have paid educational expenses. You meet the criteria even if you used a student loan to pay for the educational expenses. You cannot claim education expenses that have been paid for with a scholarship, however.

There are some cases when you cannot take this deduction. If you earned $65,000 last year (or $130,000 if you are filing jointly with your spouse), you’re eligible for the deduction. Above that income level, the deduction is phased out, and filers earning more than $80,000 ($160,000 for joint filers) are ineligible for the credit.

In addition, married taxpayers filing separately do not qualify for the deduction. Also, you cannot claim this and one of the education credits (details below) for the same person during the same year. Finally, insurance, medical expenses, room and board and transportation do not qualify for eligible education expenses.

2. American Opportunity Credit

This is a refundable tax credit rather than a deduction. What that means is this directly reduces the amount of tax you have to pay, rather than reducing your taxable income. It also means that if the credit owed to you is greater than the tax you owe, you will still receive a refund from Uncle Sam—up to 40% of the credit amount. The maximum credit allowed per student is $2500.

2012 was also the last year for this tax credit, so be sure to take advantage of it if you had qualified education expenses last year.

Eligibility requirements are slightly different than for the Tuition and Fees Deduction. A student must be enrolled at least half-time in an undergraduate degree-granting program to qualify. You can only take advantage of this credit for four years, so if last year was your fifth in your pursuit of a Bachelor’s, you’re out of luck. Unlike the Tuition and Fees Deduction, textbooks and supplies do not need to be purchased from the university to qualify for the credit.

The credit is phased out for filers who earned more than $80,000 (or married couples filing jointly who earned $160,000). Just like the Tuition Deduction, insurance, medical expenses, room and board, and transportation do not qualify as education expenses.

3. Lifetime Learning Credit

This tax credit shares several similarities with the American Opportunity credit. This $2000 credit is nonrefundable, however, meaning that if your credit is greater than the amount you owe, you will not receive the balance as a refund.

Eligible students can be taking as few as one class at a time to qualify. Any post-secondary education is eligible, and it is not required that the student be in a degree-granting program. Unlike the American Opportunity Credit, you can use this credit for any number of years that an individual student is enrolled in classes, not just the first four years of undergraduate education.

Single filers earning $51,000 or less (or joint filers earning $102,000) are eligible for the full credit, but that credit is reduced for those making more than amount, and completely phased out at $61,000 ($122,000 for couples). The same personal expenses are excluded from qualifying expenses as in the Tuition Deduction and the American Opportunity credit.

For all three of these opportunities, double-dipping by claiming more than one of them is not allowed. Also, expenses paid last year for classes taken in January through March of this year can be filed with last year’s taxes.

Though wading through the IRS’s rules can be frustrating, it’s certainly worth it to take advantage of all the opportunities to save money. As April 15 looms closer, make sure you take the time you need to educate yourself on your options, and maximize that refund!

Are you planning to use any of these credits or deductions when filing your tax return?

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Last Edited: March 11, 2013 @ 11:40 am
About Emily Guy Birken

Emily Guy Birken is a former English teacher, and an excellent freelance writer. She's also a stay-at-home-mom. She resides in Lafayette, IN, with her engineer husband and son. Emily's thoughts on parenting and life in general are found at The SAHMnambulist.

2 comments
Mike Piper
Mike Piper

Excellent explanation.

Additional (potential) option: If you have a business, you may be able to count the education expenses as a business expense, thereby saving on SE tax as well. :) (Chapter 12 of IRS Pub 970 has more info.)

Philip Taylor
Philip Taylor

Great addition, Mike. Always the entrepreneur.