Several options exist for getting a tax break from education expense. And, there is even a new one! Sometimes with all of the options, it feels like you need a PhD to find the right education credit for your return. So, let me make the process a little simpler for you. Your options include three credits and one deduction.
1. American Opportunity Credit
2. Hope Credit
3. Lifetime Learning Credit
4. Tuition and Fees Deduction
Let’s first look at the new credit, the American Opportunity Credit.
You may not take this credit if you file 1) Married Filing Separate, 2) if filing Single, Head of Household, or Qualifying Widow(er) and you adjusted gross income is greater than $80,000 or 3) if filing Married Filing Joint and your adjusted gross income is greater than $160,000.
The great thing about this credit is it is available for all four years of school, unlike the Hope Credit that is available for the first two years. The credit maxes out at $2,500 per year, unless you are a student in the Midwestern Disaster zone where the credit maxes out at $3,600. A portion this credit is refundable, meaning that even if the government does not keep any of your earning, you may receive a portion of the credit back as a refund.
The Hope Credit
This credit applies to the first two years of college and is non-refundable, meaning that it can reduce your tax liability up to the amount of the credit or zero, but it will not place any of the credit in your wallet.
The Lifetime Learning Credit
To take the lifetime learning credit, the student must be in post-secondary education and claim up to $2,000 ($4,000 if in school in the Midwestern Disaster zone). The charm of this credit is that there is no year limit on this credit, so it is not just for those in the first two or four years of post-secondary education.
Tuition and Fees Deduction
Depending on your income level you may be able to deduct up to $4,000 of qualified education expenses from your income. This is different from the other options in that it is not a tax credit but instead is an actual adjustment to your income which will help reduce any tax you may owe. This deduction is reported on line 34 of the Form 1040.
For a more detailed description of the options available to you, visit the IRS website
For all four, the expenses must be qualified, meaning for tuition, books, or other expenses required by the education institution as a condition of being a student. And they must be for you, a spouse, or someone claimed as a dependent on your tax return. As well, the IRS advises that “you cannot take both an education credit and a deduction for tuition and fees… for the same student in the same year”.
Hopefully this provides some insight into which credit or deduction is best for you. That is what this blog is all about- making taxes simpler!
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.