A reader recently asked me about tax benefits for college tuition. She’s a mom thinking about going back to school for a new career and also thinking about how she will afford her children’s future education. Educational tax benefits are confusing because there are a number of options, and if you try to read all the details on the IRS website, you’ll probably end up either confused or asleep. To make it a little simpler for you, I’ll break it down to just the basics.
There are really only three options for getting a tax break on tuition that you’ve paid in the current tax year. There are some other tax benefits for saving for college, but that’s a post for another day. For tuition paid, there are two credits and one deduction available. If you don’t understand the difference between a credit and a deduction, start by reading my post on the most important tax lesson you need.
All three of these benefits apply to expenses paid in the current tax year for classes that take place in the current year or the first three months of the upcoming year. For example, you can deduct a tuition bill paid in December of 2016 for classes starting in January 2017 on your 2016 taxes. This tuition can be paid on behalf of the taxpayer, spouse, or dependents.
All of these tax benefits have income restrictions in the form of a Modified AGI Phaseout Range. For most of us, this number is simply just our income before taxes (or all of our box 1’s from our W-2’s added together). If your total income before taxes is below this range, you meet the income requirements. If you’re in the middle of the range, you may qualify for a partial benefit, and if you’re above the range, you don’t qualify.
American Opportunity Tax Credit (AOTC)
- Qualifying Expenses: Tuition, books, and supplies
- Enrollment Requirements: Must be enrolled at least part-time, in a program leading to a degree
- Maximum Amount: $2,500 per year per student (multiple students allowed on one tax return), $1,000 is refundable
- Calculation: Credit is 100% of the first $2,000 in expenses plus 25% of the next $2,000 in expenses
- Limits: Only available for a maximum of 4 years per student for a maximum lifetime value of $10,000/student
- Modified AGI Phaseout Range: $80,000-90,000 for single or $160,000-$180,000 for married filing jointly
- Note: The AOTC replaced the former Hope Scholarship Tax Credit
Lifetime Learning Credit
- Qualifying Expenses: Tuition and required fees only (does not include most books, unless required to be purchased directly from the school)
- Enrollment Requirements: One or more courses in undergraduate, graduate studies, or for improvement of job skills
- Maximum Amount: $2,000 credit per year per tax return (regardless of number of students), not refundable
- Calculation: Credit is 20% of the first $10,000 in expenses
- Limits: Can be taken an unlimited number of years
- Modified AGI Phaseout Range: $55,000-65,000 for single or $110,000-$130,000 for married filing jointly
Tuition and Fees Deduction
- Qualifying Expenses: Tuition and required fees only (not most books, unless required to be purchased directly from the school)
- Enrollment Requirements: Undergraduate and graduate courses
- Maximum Amount: $4,000 credit per year per tax return
- Calculation: $4,000 deduction in taxable income that does not require itemization (no Schedule A required)
- Limits: Can not claim both the deduction and an education credit for the same student in the same year
- Modified AGI Phaseout Range: $65,000-80,000 for single or $130,000-$160,000 for married filing jointly
Which One Should I Take?
You can only take one educational tax benefit for each student in a year.
- AOTC: If the expenses were paid for someone working towards a degree in their first 4 years of post-secondary education, enrolled at least half time, and for a student who hasn’t claimed the AOTC (or Hope Scholarship) 4 times in the past, definitely take the AOTC. It’s a great deal and should be your first choice.
- Lifetime Learning Credit: If the student is pursuing graduate studies, job training classes, or has already maxed out the AOTC benefits, your second choice is the lifetime learning credit.
- Tuition and Fees Deduction: Generally, the only reason anyone would take the tuition and fees deduction is if they do not qualify for the AOTC and don’t meet the income requirements of the Lifetime Learning Credit.
What if I Had Financial Aid or Loans?
- Grants or Scholarships: If you paid for your tuition with non-taxed grants or scholarships, then you can not count that portion of tuition as paid by you. If you paid for some of your tuition yourself, you may still qualify for that portion.
- Employer Tuition Benefits: If your employer reimbursed you for your tuition with tax-free money, then you can not count that as tuition paid by you for tax purposes.
- Student Loans: If you paid for your tuition with student loans, then you can still count that tuition as paid by you, because you are responsible for repaying those loans. The tuition is counted as paid on the date the loan disperses.
College tax benefits can get confusing, but I hope this helps you to see what is possible. If you’re paying for college expenses now, save your receipts for books and watch your mail for a 1098-T form (record of tuition paid) from your college early next year, and you will be prepared to maximize your tax benefits when you file your tax return.
Are you paying for tuition for yourself or anyone else this year? Comment below or join the discussion in the Smart Family Money Facebook group.