About Tax Credits

tax credit notes

For eligible participants, there are two tax credits that can be taken for qualified education expenses. Consider these credits as grants that can reduce your total educational expense.

Note that only one of the tax credits can be taken in a given tax year for a single student - you can't take both take both tax credits for the same student. But you can take one tax credit for one student and another tax credit for your second student.

Likewise, interest paid on student loans may be taken as deductions to reduce your tax burden. The student loan interest deduction is claimed as an adjustment to income.

Please reference the IRS publications regarding these tax benefits:

IRS publication 970, tax benefits for education

Use this tally sheet to keep tabs on your financial aid needs.

American Opportunity Credit

tax credit notes

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• provides for a maximum $2500 per year per eligible student
• it is available only for the first four years of post secondary education
• the student must be enrolled at least 1/2 of the full-time workload in a program that leads to a degree, certificate or other educational credential.

 

IRS publication 970 for more information

Lifetime Learning Credit

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• provides for a maximum $2000 per year per family
• it is available for any year of post secondary education including graduate work and for courses to acquire or improve job skills
• student does not need to be pursuing a degree or other recognized education credential

 

IRS publication 970 for more information

Tax Deduction for Student Loan Interest

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If your modified adjusted gross income (MAGI) is less than between $70,000 and $85,000 ($140,000 and $170,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is claimed as an adjustment to income. This means you can claim this deduction even if you don't itemize deductions on Schedule 1 (Form 1040).

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

IRS publication 970 for more information

Tuition and Fees Deduction

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If you don't qualify for the American Opportunity or Lifetime Learning tax credit, you may be eligible to deduct the paid tuition and fees during the year from your income subject to tax for up to $4,000.

You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction to the education credits.

You can take the deduction as an adjustment to income. This means you can claim this deduction even if you don't itemize deductions on Schedule 1 (Form 1040).

IRS publication 970 for more information

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