There are two different federal education tax credits and one educational expense deduction that reduce federal income taxes for those who qualify. They are:
The American Opportunity Tax Credit – “AOTC”
The Lifetime Learning Credit – “LLTC”
The Tuition & Fees Deduction (Expired 12/31/2016)
Q & A
How do the federal education tax credits work?
An education tax credit reduces your federal income taxes dollar-for-dollar, up to the maximum credit allowed by law. The credits are calculated separately each tax year and you may use the tax credit that saves you the most federal income tax.
Federal tax credits work like rebates – rather than an educational discount. You must pay your educational expenses up front and collect the rebate in the form of reduced withholdings or a lower tax bill on your tax return the following spring. But just like grants and scholarships that act as college discounts, the tax credits are free money that reduce the NET PRICE you have to pay for college.
How do I qualify to claim a federal credit?
Federal education tax credits are earned by paying for college tuition, books, supplies and required fees with your own money or with money you borrow.
What is the maximum tax savings available through the American Opportunity Tax Credit?
The maximum federal tax credit is $2,500 per year, per student for the first four years of college.
For many families the AOTC results in a federal tax savings of $10,000 per student over the first four years. This translates to a $10,000 DISCOUNT!
How is the AOTC credit calculated?
The credit amount is computed using 100% of the first $2,000, plus 25% of the next $2,000 of qualifying tuition, books, supplies and required fees that you pay each year from your own money or money that you borrow for education.
If you have a 529 College Savings Plan and want to benefit from the AOTC, you must pay at least $4,000 of education expenses each calendar year from your own or borrowed funds.
What if I don’t owe $2,500 of federal taxes each year?
The AOTC is used first to offset your federal income tax. If there is AOTC remaining after your tax is reduced to $0, you are eligible to receive a refund of the remaining balance up to a maximum of $1,000 or 40% of the original credit amount, whichever is less.
Let’s say you paid $4,000 of qualifying expenses and earned the maximum AOTC of $2,500. Your federal income tax is only $800. You use $800 of your AOTC to reduce your federal tax to $0 and have a remaining credit balance of $1,700. The remaining balance, up to a maximum of $1,000, is refundable to you by the IRS. In this case you will receive an additional refund of $1,000 (40% X $2,500).
Are there any income restrictions?
If you file as single, head of household or qualifying widow(er), your AOTC begins to disappear when your income is greater than $80,000 and is gone completely at $90,000.
If you file as married filing jointly, your AOTC starts to go away when your income reaches $160,000 and is gone completely at $180,000.
Married couples filing separately are not eligible to claim the credit.
What tax credits are available after the first four years of college?
The Lifetime Learning Tax Credit (LLTC).
What are the specifics of the Lifetime Learning Credit?
The LLTC is a non-refundable federal tax credit of up to $2,000 per tax return per year.
When may you claim the Lifetime Learning Credit?
The LLTC is available for any year of post-secondary education.
How is the LLTC calculated?
The LLTC is 20% of the first $10,000 of college tuition, books, supplies and required fees paid by you during the year.
At what income level do we start to lose the LTC?
The LLTC begins to phase out for single, head of household and qualifying widow(er) at $52,000 and is gone at $62,000.
For married couples filing jointly the phase out begins at $104,000 and is gone at $124,000.
The phase out limits will be adjusted in the future for inflation.
What is the basic difference between the AOTC and the LLTC?
The Lifetime Learning Credit is $2,000 per tax return and is not refundable, whereas the AOTC is $2,500 per student and up to $1,000 per student is refundable.
Which tax credit is best for me?
It depends on your specific tax situation, but the AOTC generally produces the largest tax savings during the first four years of school. For years five and beyond, the Lifetime Learning Credit is the only credit available. You should discuss the benefits of each tax credit with your tax preparer or run simulations with your tax software in order to decide which is best for you.
What is the Educational Tuition and Fees Deduction? (Expired 12/31/2016)
Instead of claiming a tax credit, the tax laws allows you to deduct up to $4,000 of college tuition, books, supplies and required fees you paid during the tax year.
Where does the education expense deduction go on my tax return?
The deduction is on the front page of your tax return, so you do not need to itemize your deductions in order to claim it.
How is the deduction determined?
There are three tiers of education tax expense deduction available; $4,000, $2,000 and $0. The amount you qualify for is based upon your tax filing status and income.
May we claim both a tax deduction and a tax credit for the same student in a tax year?
No. But if you have more than one student, you may claim a tax credit for one and a tax deduction for the other. This is not typical.
How does a tax deduction compare to a tax credit?
A tax deduction reduces your income that is subject to tax whereas a tax credit reduces your actual tax. In most cases, a tax credit will produce a greater savings than a tax deduction. You should consult with your tax advisor to determine which will provide the most benefit for you.
NOTE: The deduction for qualified education expenses ended with the 2016 tax year.
Note: Access Applied does not provide tax or legal advice. Users of this website should check with their tax professional to determine how tax credits and/or deductions apply to their individual situation.