Tax Credits for Higher Education Costs
Higher education costs are always increasing, but there are several tax incentives available to taxpayers to help offset those costs. Coverdell education savings accounts, qualified tuition programs, the American opportunity tax credit, the lifetime learning credit, education savings bonds, and the student loan interest deduction are all avenues that taxpayers can explore. The American opportunity tax credit and the lifetime learning credit can both be used to reduce the amount of tax a person owes on their tax return.
Overview
Taxpayers can claim these two credits for qualified education expenses that are required for the enrollment or attendance of the taxpayer, spouse, or claimed dependent at an eligible educational institution and paid by the taxpayer. Eligible educational institutions are generally defined as accredited colleges, universities, vocational schools, or other post-secondary institutions. Qualified education expenses are those that are required for the enrollment or attendance of a student at an educational institution (the American Opportunity Tax Credit also includes course materials such as books, supplies, and equipment). To determine if a fee is a qualified tuition or related expense, taxpayers should look at whether the fee is required to be paid to the educational institution as a condition of enrollment or attendance. Expenses that commonly do not qualify include room and board, student health fees, and transportation.
Dependents cannot claim the credits; qualified education expenses paid by a student are treated as paid by the taxpayer of whom they are a dependent. If the taxpayer is married, the credits are only allowed if the taxpayer and spouse file a joint tax return. The credit amount phases out for taxpayers with a modified adjusted gross income between $80,000 and $90,000 for single taxpayers and $160,000 and $180,000 for those filing jointly.
The American Opportunity Tax Credit
The American Opportunity Tax Credit provides taxpayers a credit for 100% of the first $2,000 of qualified education expenses paid for an eligible student, plus 25% of the next $2,000 of qualified education expenses, for a maximum credit of $2,500 per eligible student. An eligible student is any person who:
- Has not completed the first four years of post-secondary education at an eligible institution;
- Is enrolled at least half-time for at least one academic period beginning during the calendar year or the first three months of the following calendar year, in a program that leads to a degree, certificate, or other recognized educational credential;
- The credit has not been claimed by anyone for the student for the previous four tax years; and
- The student has not been convicted of any offense for possession or distribution of a controlled substance.
The credit is also partially refundable; 40% of the allowable credit may be claimed in excess of tax liability, except if the student is subject to the kiddie tax (at which point no portion of the credit is refundable).
The Lifetime Learning Credit
The Lifetime Learning Credit gives taxpayers 20% of up to $10,000 of the qualified education expenses paid for post-secondary education furnished to the taxpayer, their spouse, or a claimed dependent. The maximum credit of $2,000 is per taxpayer, not student, and is nonrefundable.
An eligible student for the Lifetime Learning Credit is anyone who is enrolled in a post-secondary educational institution for at least one course or someone who is enrolled in courses to acquire and/or improve job skills. The student does not have to be pursuing a degree; they may simply be trying to improve their skills. There is no limit on the number of years that this credit can be claimed for an individual.
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