If you're planning to pay tuition in 2017, either for yourself or for a dependent, you may be able to take advantage of one of three valuable tax breaks. The best tuition tax break for you depends on your income and the student's status in school, and there's a quick guide to determine which you qualify for. In order of most lucrative to least, here are the three possibilities.
| Tax Break | Maximum Benefit | Special Qualifications | MAGI Phase-Out (single) | MAGI Phase-Out (married, filing jointly) |
|---|---|---|---|---|
| American Opportunity Tax Credit | $2,500 credit per student | Degree program, half-time enrollment | $80,000 to $90,000 | $160,000 to $180,000 |
| Lifetime Learning Credit | $2,000 credit per tax return | Low- to moderate-income | $55,000 to $65,000 | $110,000 to $130,000 |
| Tuition and Fees Deduction | $4,000 deduction | N/A | $65,000 to $80,000 | $130,000 to $160,000 |
Data source: IRS. MAGI = modified adjusted gross income.
The American Opportunity Tax Credit
The American Opportunity Tax Credit is the most valuable of these three tuition-related tax breaks, but it is also the most difficult to qualify for. If you can get it, the credit is worth up to $2,500 per year, per student, for up to four years of qualifying higher education expenses.
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Specifically, the credit is worth 100% of the first $2,000 of qualifying expenses, and an additional 25% of the next $2,000. In other words, for the first $4,000 you pay in tuition, the government will give you $2,500 of it back -- an effective savings of about 63%.
Keep in mind that this is a tax credit, not a deduction. Unlike a deduction, which simply reduces your taxable income, a credit reduces the amount of tax you owe dollar-for-dollar. Even better, this credit is partially refundable. Even if your tax for the year is reduced to zero, 40% of any remaining credit amount can be refunded to you.
The catch is that this credit can only be used for the first four years of postsecondary education, with some specific requirements. If the student has completed four years of higher education before the beginning of the tax year, he or she is automatically ineligible, regardless of whether they used the credit for those years. Additionally, to claim the credit, the student must be taking courses toward a degree or some other type of credential, must be enrolled on at least a half-time basis, and have no felony drug convictions.
The American Opportunity Tax Credit can be taken by the student themselves, if nobody else can claim them as a dependent, or by someone else who paid their tuition, such as a parent, if they are a dependent. To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less if you're single or $160,000 or less if you are married filing jointly. A partial credit may be available up to MAGI limits of $90,000 and $180,000, respectively.
The Lifetime Learning Credit
While it's not as lucrative as the American Opportunity Tax Credit, the Lifetime Learning Credit is much more flexible in terms of its qualifications. Students do not need to be in the first four years of postsecondary education, nor do they need to be seeking a degree or another credential. You can take as little as one course simply for personal enrichment and still qualify for the credit.
This credit is worth 20% of the first $10,000 in qualified tuition expenses per year, so the maximum value is $2,000 per return, not per student. This isn't that far off from the American Opportunity Tax Credit, but notice that you have to spend more to take full advantage.
The income restrictions for the Lifetime Learning Credit are a bit more restrictive than for the American Opportunity Tax Credit. For single filers, the credit begins to phase out at $55,000 in MAGI and disappears completely above $65,000. For married couples filing jointly, the thresholds are $110,000 and $130,000, respectively. Also, unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is nonrefundable. If you have no federal income tax liability, any excess credit cannot be refunded to you.
Tuition and fees deduction
If your income is too high to qualify for the Lifetime Learning Credit, and you don't meet the educational requirements for the American Opportunity Tax Credit, you may still be able to take a deduction for your tuition and fees. This is an above-the-line deduction, meaning that it can be taken whether or not you itemize deductions on your tax return. You can use this to deduct up to $4,000 in qualifying tuition and fee expenses, which will reduce your MAGI for the year.
The income limits for the tuition and fees deduction are slightly more generous than those of the lifetime learning credit. The phase out for the tuition and fees deduction begins at an AGI of $65,000 for singles, and $130,000 for married couples filing jointly, and the thresholds where the deduction disappears completely are $80,000 and $160,000, respectively. If your filing status is married filing separately, you cannot take the deduction.
What expenses can you use to figure out your tax break?
When you receive your form 1098-T in the mail, you may see two different numbers for tuition. Box 1 of the form contains the amounts you paid during the calendar year. Box 2 contains the amounts school billed during the calendar year.
According to the IRS, the "payments made" is the more important number. When figuring your credit or deduction, you can use the payments you made in 2017 for academic periods beginning in 2017, or beginning during the three first three months of 2018. For example, if you pay your spring 2018 tuition bill in December 2017, you can use that to figure your 2017 credit or deduction. So, be sure that you are using the correct number when figuring out your credit or deduction.
