Paying for education can be prohibitively expensive. Thankfully, there are a number of tax breaks available to students or their parents, who are often the ones to foot those bills.
Before we dive into the specific tax breaks students and parents can claim, let's review the difference between a tax credit and a tax deduction, since these benefits exist at both levels. A tax credit is a dollar-for-dollar reduction of your tax liability, which means if you owe the IRS $2,000 and apply a $2,000 tax credit, that debt is wiped out.
A tax deduction, meanwhile, exempts a portion of your income from taxes, and your savings relate to the tax bracket you fall into. If you claim a $2,000 tax deduction, you don't pay taxes on $2,000 of earnings. If you fall into the 22% tax bracket, that means you save $440 on your tax bill, but someone in a different bracket will save a different amount.
With that out of the way, here are a handful of tax benefits you may be eligible for in the 2020 or 2021 tax year.
1. The American Opportunity Tax Credit (AOTC)
The AOTC lets you score a maximum tax credit of $2,500, of which 40% is refundable. That means if your tax liability falls below $0, the IRS will pay you back part of the difference.
To qualify for the AOTC, you'll need to be enrolled in higher education on at least a half-time basis, and you'll need to be in the process of completing one of your first four years of postsecondary education. From there, you can claim qualified expenses like tuition, books, and other supplies or equipment needed in the course of your studies.
The AOTC is worth 100% of your first $2,000 of qualified expenses and 25% of your next $2,000 of eligible expenses. All told, that's $2,500.
As is the case with many credits, there are income limits associated with the AOTC. To claim the credit in full, you'll need a modified adjusted gross income (MAGI) of $80,000 or less if you're a single tax filer, or a MAGI of $160,000 or less if you're a married couple filing jointly. You can claim a partial credit if your MAGI exceeds $80,000 but does not exceed $90,000 as a single filer, or if your MAGI exceeds $160,000 but does not exceed $180,000 as a married couple filing jointly. These limits apply to both the 2020 and 2021 tax years.
2. The Lifetime Learning Credit (LLC)
While the AOTC applies to postsecondary education, the LLC can be used to offset any education costs you may have incurred. The LLC is worth 20% of up to $10,000 in qualified education expenses for a total of $2,000. However, unlike the AOTC, the LLC isn't refundable at all, so the most it can do is knock your tax liability down to $0.
Like the AOTC, there are income limits associated with the LLC. For the 2020 tax year, you can claim the LLC in full if you're a single tax filer with a modified adjusted gross income (MAGI) of $58,000 or less. If you're married filing a joint tax return, you can claim the LLC in full with a MAGI of $116,000 or less. Meanwhile, you can claim a partial credit if your MAGI exceeds $58,000, but not does exceed $68,000 as a single tax filer; or if your MAGI exceeds $116,000, but does not exceed $136,000 as a married couple filing jointly.
In 2021, you can claim the LLC in full if you're a single tax filer with a MAGI of $59,000 or a married couple filing jointly with a MAGI of $119,000. From there, the credit will phase out completely once your MAGI exceeds $69,000 as a single tax filer or $139,000 as a married couple filing jointly.
3. The student loan interest deduction
What makes the student loan interest deduction so valuable is that it's considered an above-the-line deduction, which means you don't have to itemize on your taxes to claim it. To qualify for the student loan interest deduction, you must have a student loan in your own name. You also can't be listed as a dependent on someone else's tax return, and your filing status cannot be married filing separately.
The most you can claim for the student loan interest deduction is $2,500. To be clear, that's just the interest portion of your loan -- not its principal.
There are also income limits associated with the student loan interest deduction. For the 2020 and 2021 tax years, you'll get your full deduction as a single tax-filer with a MAGI of up to $70,000. From there, the deduction will phase out and you won't get to claim it once your MAGI exceeds $85,000. If you're a married couple filing jointly, you can claim the full deduction with a MAGI of up to $140,000. From there, the credit starts to phase out and is off the table once your MAGI exceeds $170,000.
Know your tax breaks
If you're paying for education, you may be entitled to serious savings on your tax returns. Be sure to read up on the tax breaks you're eligible for so you don't miss the chance to keep more of your hard-earned money for yourself.