College Student Tax Deductions

Parents ask us often about any tax breaks for which they are eligible when they have a student with qualified college expenses.  As we are in the middle of tax season, here is a quick review.  This is for overview purposes only.  Please consult your financial or tax adviser to understand how this specifically applies to your situation.

There are four different tax breaks for which you may qualify - American Opportunity Credit, Lifetime Learning Credit, Student Loan Interest Deduction and Tuition and Fees Deduction.  A credit is different than a deduction.  Remember that with a credit, you are deducting the amount of your tax.  With a deduction, you are reducing the income being taxed.  Below, we'll cover each in some detail, and before doing so, here is what you need to keep in mind for all of these credits:  The government will give you breaks, but only once.  If you have taken a tax break on something you paid, you cannot take another break on the same expense.

American Opportunity Credit
This is a maximum $2,500 credit per eligible student.  You may be able to claim this credit if your modified adjusted gross income (MAGI) is under $180,000 if married filing jointly, or under $90,000 if single, head of household or a widow or widower.  The student must be enrolled at least half time and pursuing a program leading to a degree or other recognized education credential.  This credit can only be claimed a maximum of four times, including any year that the Hope credit was claimed.  Qualifying expenses include tuition, enrollment fees and course materials.

The expenses you are claiming cannot be claimed under any other tax credit, and cannot be paid with tax-free funds (529 plan, Coverdell Plan, etc), nor can these expenses be claimed as business expenses in addition to claiming them for this tax break.

Lifetime Learning Credit
This is a maximum $2,000 credit per return.  You may be able to claim this credit if your modified adjusted gross income (MAGI) is under $124,000 if married filing jointly, or under $62,000 if single, head of household or a widow or widower.  This credit is available for all years of postsecondary education and for courses to acquire or improve job skills.  This credit can be claimed an unlimited number of years.  Qualifying expenses include tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies and equipment).

The expenses you are claiming cannot be claimed under any other tax credit, and cannot be paid with tax-free funds (529 plan, Coverdell Plan, etc), nor can these expenses be claimed as business expenses in addition to claiming them for this tax break.

Student Loan Interest Deduction
This is a maximum income reduction of $2,500.  You may be able to claim this credit if your modified adjusted gross income (MAGI) is under $155,000 if married filing jointly, or under $75,000 if single, head of household or a widow or widower.  The loan must have been taken out solely to pay qualified education expenses, and cannot be from a related person or made under a qualified employer plan.  The student must be you, your spuse or your dependent, and enrolled at least half-time in a degree program.  This credit can be claimed as long as there is a loan balance. 

You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest).

Tuition and Fees Deduction
This is a maximum income reduction of $4,000.  You may be able to claim this credit if your modified adjusted gross income (MAGI) is under $180,000 if married filing jointly, or under $80,000 if single, head of household or a widow or widower.  Qualifying expenses include tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board..  The student must be you, your spouse or your dependent, for whom you claim an exemption.   

The expenses you are claiming cannot be claimed under any other tax credit, and cannot be paid with tax-free funds (529 plan, Coverdell Plan, etc), nor can these expenses be claimed as business expenses in addition to claiming them for this tax break.

Here is the document giving additional detail for these tax breaks:  IRS Education Tax Credits Publication.