Education is expensive, whether you're in college for the first time or going back to school for training. But the tax laws offer some help by providing many different educational tax breaks. In particular, three key tax laws can help you cut your tax bill, but it's critical to pick the best one for your needs, because you can't use more than one in any given year. Below, we'll go through these three education tax breaks to help you decide which one to use.
1. The American Opportunity Tax Credit
The most lucrative of the educational tax breaks available to most taxpayers is the American Opportunity Tax Credit. This credit is aimed at undergraduate college students, and it's available for up to four years of post-high school education. To qualify, you have to be enrolled at least half-time in a degree program or be in line to receive a certificate or other educational credential when you finish your course of study. Moreover, those who have already finished four years of college or other post-high school education aren't eligible.
The reason the American Opportunity Tax Credit is so valuable is that it pays a large amount to taxpayers. For qualified educational expenses up to $2,000, you can get a 100% credit, essentially making the first $2,000 you spend free. After that, the next $2,000 you spend is eligible for a 25% credit. That means that if you spend at least $4,000 on education, you'll get the maximum $2,500 credit. In addition, up to 40% of the credit is refundable, so if you qualify for the full $2,500 amount, you can claim up to $1,000 as an additional refund even if you have no federal tax liability at all.
As with many educational tax breaks, qualified expenses are limited to tuition and required fees and course materials. In particular, you're not allowed to claim related costs, such as room and board, transportation, medical expenses, or insurance premiums. Moreover, if you have modified adjusted gross income above certain levels -- $90,000 for singles, or $180,000 for joint filers -- then the credit isn't available.
2. The Lifetime Learning Credit
The other major tax credit for education is the Lifetime Learning Credit. It's aimed at a broader range of students, including graduate students and those who go back to school for further training. You can claim the Lifetime Learning Credit in an unlimited number of years, and you don't have to be part of a degree program or have a minimum course load to take advantage of it.
The Lifetime Learning Credit is a little less generous than the American Opportunity Tax Credit, maxing out at $2,000. You can claim 20% of what you spend on qualified educational expenses up to $10,000 each year. Again, tuition, required fees, and mandatory course materials are the permitted expenses.
Lower income limits apply to the Lifetime Learning Credit. The credit is unavailable for those with modified AGI above $65,000 for single filers or $130,000 for joint filers, with phaseouts applying below those levels. There are no provisions for any of the credit to be refundable.
3. The Tuition and Fees Deduction
Finally, those who can't or don't want to take the two credits above can use the Tuition and Fees Deduction as a tax break. The provision allows taxpayers with modified AGI of $65,000 or less for singles or $130,000 or less for joint filers to claim expenses of up to $4,000 as a deduction, reducing taxable income. A lower maximum deduction of $2,000 is available for higher incomes of up to $80,000 for singles and $160,000 for joint filers. Again, only tuition and required fees are eligible for the provision.
As a deduction, the value of the Tuition and Fees Deduction depends on your tax bracket. For those who qualify for the $4,000 deduction, the value of the deduction will typically vary between $400 and $1,000, given that the income limits generally put you in the 10%, 15%, or 25% brackets. However, you can claim the deduction without itemizing, which makes it useful.
Get the most help you can
These three tax breaks can help a wide variety of students and their families afford education more easily. In general, the American Opportunity Tax Credit will be the most valuable, followed by the Lifetime Learning Credit and the Tuition and Fees Deduction in that order. However, with a variety of different eligibility requirements, the odds are good that you can claim at least one of these tax breaks and cut your tax bill.