Tax Credits for Education


NEW YORK (MainStreet) —After having her first child, Deborah Harris, 32, decided to go back to school. She decided to pursue a master's degree in fashion, a subject she had loved since high school.

Even though her husband works and she attends school part-time, paying for college can get costly.

“It’s not a financial burden yet, but I can see it becoming one if I don’t get a job,” Harris says.

For the past four years, she has been taking classes online at the Academy of Art University in San Francisco. Harris is roughly $100,000 in debt, a result of both undergraduate and graduate school expenses.

Aside from getting a student loan interest tax form every year from her school, she wasn’t aware that she could deduct her education expenses on her tax return.

Harris is one of many taxpayers who either doesn’t know that tax breaks are available or forgets to file them.

In a 2009 IRS report, researchers found that tax filers didn’t always claim tax deductions that would maximize their benefits. The report showed that about 14% of filers failed to claim a credit or deduction.

On average, filers lost a tax benefit of $466, resulting in about $726 million dollars unclaimed in 2009.

“Lots of families aren’t aware that they can claim education costs,” says Mark Kantrowitz, publisher of and, websites that provide student financial aid information. “Even if they are aware, they don’t know enough about these benefits, or that they could have claimed more.”

Take a look at five tax breaks that can help ease the burden of paying for a college education.

1. The American Opportunity tax credit (AOC) provides a tax credit of up to $2,500 per student based on the first $4,000 you spend for your college education, including tuition, fees and required course materials or equipment--but no room or board costs.

A student must be enrolled in a degree program and have taken at least half the full-time courses for at least a semester during the year.

“The credit is limited to four years,” Kantrowitz says. “And it’s often geared towards students pursuing an undergraduate education.”

To be eligible, your modified adjusted gross income must be $80,000 or less if you’re single, or $160,000 or less if you’re married and filing a joint return.

The tax credit is “phased out” for taxpayers with incomes above these levels. In other words, “if your income is $85,000, you only get to claim half of that tax credit--which is $2,500, so you can claim about $1,200,” according to Kantrowitz.

The Lifetime Learning Credit gives you a little bit of leeway. You can claim up to $2,000 for higher education—which can include graduate school, continuing education courses, or even taking a single class.

“You don’t have to seek a degree, but the training must be provided by a title IV school, like a local community college,” says Kantrowitz. “You need to check if that institution receives federal student aid.”

Tax filers are eligible if they have a modified adjusted income of $62,000 if single, and $124,000 if married and filling a joint return.

The good news is that this tax credit is available for an unlimited number of years. The bad news is that the difference between both credits is you won’t get money back for the Lifetime Learning Credit.

“The Lifetime Learning Credit can reduce your tax bill, but it’s not refundable credit,” said Karen McCarthy, a policy analyst at the National Association of Student Financial Aid Administrators.

In other words, if you owe Uncle Sam $2,500 in taxes, but you have a $2,000 tax credit, the credit will bring down your bill to $500.

But there’s also another catch.

“You can’t double dip,” says Kantrowitz. “You can’t use both credits for the same student in the same year.”

McCarthy recommends checking to see if you’re eligible for the AOC credit first because it offers greater benefits.

3. Another option is deducting tuition and fees from your tax returns. The deduction can reduce the amount of your income subject to tax by up to $4,000. The downside is that you can only claim $4,000 for the whole family, no matter how many of your kids are going to college.

You also can’t claim the deduction if you’re married and you filed separately, you have a modified adjusted gross income more than $80,000 if you’re single, or $160,000 if you’re married and filing a joint return.

4. 529 Plans For parents who want to get a head start on saving for their child’s education, there are state-sponsored college savings plans, called Section 529 plans, that function like a 401(k) plan. Instead of saving for retirement, you’re saving for college.

The interest you earn in a 529 plan is tax-free. And when you’re ready to dip into the plan to start paying for college, you won’t get penalized.

5. Deduct student loans For student loan borrowers, you can deduct your student loan interest if your modified adjusted gross income is $75,000 or less if you’re single, or $150,000 or less if you’re married and filing a joint return.

Student loan interest is interest you paid during the year on a qualified student loan.

Here are some expenses you can’t deduct from your tax returns:

  • Room and board
  • Transportation
  • Insurance
  • Medical expenses
  • Student fees unless required as a condition of enrollment or attendance
  • Same expenses paid with tax-free educational assistance
  • Same expenses used for any other tax deduction, credit or educational benefit

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