Education tax credits for 2023 (offset cost of tuition and fees!)
The first year of college, I went to an extremely expensive school with $40K/year tuition. Then I transferred to an in-state school for $6K/year. One of the best decisions I ever made. That $40K school is now up to $55K/year and that’s just for tuition.
Luckily, the Tax Code offers some incentives for paying for a college degree. If you’re looking at a big tuition bill, here’s are a few education tax credits that can help ease the financial burden.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides a tax credit to offset the cost of tuition, required fees, and course materials needed for attendance. It’s worth up to 100% of the first $2,000 of qualified education expenses and 25% for the next $2,000 of those expenses, for a maximum credit of $2,500 per eligible student.
The AOTC is a partially refundable credit. This means if the credit brings the amount of tax you owe to zero, up to $1,000 can be refunded to you.
The AOTC has some of the strictest requirements of the education credits. To qualify, the student has to be enrolled at least half-time, and it’s only available for the first four years of undergraduate education.
Like many credits, the AOTC is phased out for higher-income taxpayers. That phase-out is based on modified adjusted gross income (MAGI). To calculate your MAGI, take your adjusted gross income (AGI, shown on Line 7b of Form 1040) and add back certain items, such as foreign earned income that was excluded from U.S. taxable income, the foreign housing exclusion, and the foreign housing deduction. If you need help calculating your MAGI, a worksheet in Publication 970 can help.
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less if married filing jointly). Single taxpayers with a MAGI between $80,000 and $90,000 and married couples with a MAGI between $160,000 and $180,000 can claim a reduced amount of the credit. If your income is above those upper thresholds, you can’t claim the AOTC at all.
If you qualify, you can claim the credit by completing Form 8863 and submitting it with your Form 1040.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is another credit to help offset the cost of college tuition and fees.
The LLC isn’t limited to the student’s first four years of education, nor does it require the student to be enrolled at least half time. This makes it available to graduate students and people taking professional degree courses.
However, unlike the AOTC, you can’t use the LLC for course materials such as books, supplies, and computer equipment. It only applies to tuition and required fees paid directly to the college or university.
The credit is worth up to 20% of the first $10,000 of expenses, or a maximum of $2,000 per return. No portion of the LLC is refundable.
The Lifetime Learning Credit also has income limitations. For the 2020 tax year, your available credit is phased out if your MAGI is between $59,000 and $69,000 ($118,000 and $138,000 if married filing jointly). If your MAGI is above those upper limits, you can’t claim the LLC.
You can claim either the AOTC and the LLC for your own education expenses, the expenses of your spouse, or the expenses of a dependent listed on your tax return. You should receive a 1098-T from the college or university. This form shows the tuition and fees you paid during the year, and you’ll need it to help calculate your credit.
You can claim the Lifetime Learning Credit by completing Form 8863 and attaching it to your return.
Tuition and fees deduction
The tuition and fees deduction had expired at the end of 2017, but an extender bill passed in December of 2019 brought it back retroactively. So it’s now available for 2018, 2019, and 2020 tax returns. This deduction allows you to claim up to $4,000 of qualified higher education tuition and fees.
The tuition and fees deduction isn’t a tax credit. Instead, it’s an adjustment to income (also known as an “above-the-line” deduction). You can take the tuition and fees deduction even if you don’t itemize.
The tuition and fees deduction is also limited, depending on your MAGI. The income limits are the same as those used for the AOTC. You can’t claim the deduction if your filing status is married filing separately, or if you can be claimed as the dependent of another taxpayer, even if they don’t actually claim you as a dependent.
Be sure to check out our post on avoiding college tuition debt!
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Student loan interest deduction
Another valuable above-the-line deduction applies to student loan interest. You can deduct up to $2,500 of student loan interest paid on loans taken out for your own education or to pay for someone else’s education. To qualify, you must pay interest on a “qualified student loan.” Loans from a family member or employer don’t count.
As usual, there are income limits. For 2019, your MAGI must be less than $70,000 ($140,000 if married filing jointly) to take the full deduction. Above that threshold, the available credit starts to phase out until it’s eliminated entirely for taxpayers with a MAGI above $85,000 ($170,000 if MFJ).
If you paid more than $600 in interest during the tax year, your loan servicer should send you a Form 1098-E showing the interest you paid. Even if you don’t receive the form, you can still deduct the interest you paid. Just be sure to keep good records in case the IRS questions your deduction.
However, on March 13th, 2020 interest on federal student loans was suspended due to the COVID-19 Pandemic. This pause on interest accrual has been extended to September 30th, 2021. On your 2020 tax return you can deduct the interest you paid between January 1st and March 13th, but it is likely much less than you paid in previous years.
Qualified Tuition Program (529 Plan)
Maybe you’re not paying for a child’s college education yet, but putting aside money until your child reaches college age. In that case, the Tax Code still provides some tax benefits – as long as you use the right savings vehicle.
A qualified tuition program (also known as a 529 Plan) allows taxpayers to either save for or prepay a beneficiary’s qualified education expenses.
While you don’t get any tax breaks on your federal income tax return in the year you make the contribution, the money you put in the account can grow tax-free. And as long as you use the funds to pay for qualified education expenses, distributions aren’t taxable either.
Plus, most states offer a break on your state income taxes if you contribute to that state’s plan.
There are no income restrictions for contributing to a 529 Plan, and there’s no limit to the amount you can contribute. However, the IRS specified that your contributions “can’t be more than the amount necessary to provide for the qualified education expenses of the beneficiary.”
529 Plans used to be solely for saving for higher education, but the Tax Cuts and Jobs Act of 2017 made it possible to use 529 plans to pay tuition for elementary and secondary schools.
Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) used to be the college savings account of choice for most people before 529 Plans were invented. Now they’re not as popular but still offer some tax perks.
If your MAGI is less than $110,000 ($220,000 if married filing jointly), a Coverdell ESA allows you to contribute up to $2,000 per year, per beneficiary.
Like 529 Plans, contributions to a Coverdell ESA aren’t deductible, but the funds grow tax-free until they’re distributed. And distributions are tax-free as well, as long as they aren’t more than the beneficiary’s education expenses for the year.
You can use a Coverdell ESA to pay for tuition and fees, books, supplies, equipment, special needs services, room and board (for students who are enrolled at least half time), computer equipment and peripherals, and internet access. The funds can be used for primary and secondary education expenses, as well as at colleges and universities.
If you qualify for one or more of the above tax breaks, make sure you don’t “double-dip.” For example, you can’t claim the American Opportunity Credit and the Tuition and Fees Deduction for the same expenses, and you can’t claim an education credit using expenses paid for with a 529 Plan.
Overall, these tax credits exist to help ease the burden of paying for higher education, not stress you out trying to maximize the benefits of each available option. A qualified tax professional or even software like TurboTax make it easy to determine which credits you qualify for.
Just be sure to keep good records for any qualified education expenses you use to claim education credits and deductions, and enjoy the tax break while you pursue a degree.