Education Tax Credits and Deductions

Did you know there can be tax benefits for p u rs u ing higher ed ucation and/or specialized job training ? Certain tax credits, deductions, and savings plans can help with the cost of higher education expenses. Read below to see which option could work for you and the students in your life .

What do I need to know?

Just like the start of most learning plans, let’s start off with a few key terms to help you understand which tax benefits are available . The IRS Information Center for tax benefits for education provides the following definitions :

• Credit – reduces the amount of income tax you have to pay.
• Deduction – reduces the amount of your income that is taxed, which generally reduces the amount of tax you have to pay.
• Savings Plans – certain savings plans allow you to grow savings tax-free until the money is taken out ( distribution ), or allow the distribution to ne tax-free, or both.

Typically , education-related tax breaks fall into one of these three categories: tax credits, tax deductions, or savings plans. This page will provide information specific to certain credits and deductions.

Education Credits

An education credit helps with the cost of higher education by reducing the amount of tax you owe on your return.

• The American Opportunity Tax Credit(AOTC) is a partially-refundable tax credit for college education where the student must attend at least half-time. The credit is available for the first four years of college education.
• The Lifetime Learning Credit is a non-refundable tax credit of up to $2,000 per tax return, where you can claim qualifying expenses for any level of college or education courses to advance or improve job skills. There is no minimum enrollment requirement or limit on the number of years you can claim the credit.

“Refundable” means the credit is like a payment on your return. For the A OTC, If that that the credit amount is more than you owe, you may get a refund of up to $1,000.

“Non-refundable” means the credit will only reduce your tax. Even if the credit is more than you owe, you won’t get a refund.

You can claim both the American Opportunity Tax Credit and the Lifetime Learning Credit on the same tax return, but not for the same student.

Keep records of qualifying expenses you've paid

• The student should receive an IRS Form 1098-T , Tuition Statement, from the educational institution. If the student doesn’t receive the form, the student should request one from the institution. The credit can’t be claimed without an IRS Form 1098-T, Tuition Statement, unless the educational institution is not required to furnish the form under existing rules.
• Be sure to keep records that show the student was enrolled and the amount of paid qualified tuition and related expenses. You may need to send copies of those records if the IRS contacts you regarding your claim of the credit.
  

Be aware of common mistakes

• The student is listed as a dependent on another tax return.
• The student doesn’t have an IRS Form 1098-T showing he or she attended an eligible institution.
• Claiming non-qualifying education expenses (such as room and board, transportation, or other family/living expenses).
• Claiming the credit for a student not attending a college or other higher education institution.
• Trying to claim both credits for the same student.
• Filing a timely tax return and the student doesn’t have a valid SSN, ITIN, or an ATIN at that time.

Caution: The amount on Form 1098-T may not be the amount of expenses you can claim. Descriptions of which expenses qualify are available in IRS Publication 970 , Tax Benefits for Education.

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What should I do?

Compare the educational credits to see which fits your situation best

Each credit has different requirements and benefits. You can compare education credits on the IRS’s comparison chart.

Determine your eligibility

You may be eligible to claim an education credit if:

• You, your spouse, or a dependent on your tax return is the student.
• You, your dependent, or a third party (like a relative) is paying qualified education expenses for higher education.
  • Qualified education expenses are tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution. Nonacademic fees (like student activity fees or athletic fees) are qualified only if the fee must be paid to the institution as a condition of enrollment or attendance. Personal expenses (like room and board) are never qualified education expenses.
  • This means any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. If you’re not sure your school is eligible, ask the financial aid office.

  You’re NOT eligible if:

  • Someone else, such as your parents, lists you as a dependent on their tax return.
  • Your filing status is married filing separately.
  • You already claimed or deducted another higher education benefit using the same student or same expenses.
  • You (or your spouse) were a non-resident alien for any part of the year and didn’t choose to be treated as a resident alien for tax purposes.
  • The student has a felony drug conviction (applies only to a claim for the American Opportunity Tax Credit).
  • You, (or your spouse if filing a joint return), and the qualifying student didn’t have a valid taxpayer identification number (Social Security Number (SSN), or Individual Taxpayer Identification Number (ITIN), or Adoption Taxpayer Identification Number (ATIN)) issued or applied for on or before the due date of your return (including extensions).

  How will this affect me?

  You can only claim one education credit for any student and their expense. If you or your dependent qualifies for both credits, you may want to figure which deduction would give you the best benefit.

  If you receive tax-free educational assistance, such as a grant, you need to subtract that amount from your qualified education expenses.

  The PATH Act prevents you from filing past due returns or amended returns claiming the American Opportunity Tax Credit (AOTC) if the reason you’re filing is because you now have the type of valid Taxpayer Identification Number (TIN) required for each credit but such TIN wasn’t issued on or before the due date of the return (including a valid extension).

  If for any reason you or one of your family members didn’t receive a valid “taxpayer identification number” on or before the due date of the tax return (including extensions) you can’t file a past due return or an amended return to claim any of these credits. A valid taxpayer identification number could be a SSN, ITIN, or ATIN depending on the requirement for each credit.

  For tax years beginning after June 29, 2015, generally 2016 tax year returns, you must have received an IRS Form 1098-T from an eligible educational institution to claim the American Opportunity Tax Credit or Lifetime Learning Credit.

  Wait, I still need help.

  The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.

  Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.

  Deductions

  There are several education-related tax deductions that could also provide tax benefits.

  Student Loan Interest Deduction

  Depending on your income, you can take a special deduction for the interest you paid during the year on qualified student loans. The deduction can reduce your taxable income by up to $2,500 and can be claimed even if you do not itemize deductions on your tax return.

  See IRS Publication 970 , Tax Benefits for Education, for income thresholds and other requirements.

  Work-related Education Business Deduction

  This deduction may benefit workers (including those who are self-employed) who itemize their deductions and paid for work-related education.

  Claiming this deduction may reduce the amount of income you earn that is subject to tax. There are certain requirements you must meet to claim this deduction, and it cannot be claimed in addition to other education credits for the same expense.

  Visit the IRS’s Information Center for tax benefits for education to learn about all the requirements.

  MISCELLANEOUS: Educator Expense Deduction

  The Educator Expense Deduction is not applicable to students or their parents pursuing higher education but is an important education-related tax benefit. Essentially, this deduction allows educators the opportunity to to deduct up to a certain amount for unreimbursed business expenses like books, supplies, computer equipment, classroom equipment and other materials used in the classroom.

  The educator does not need to itemize deductions to take this credit. Read the IRS Tax Topic on Educator Expense Deduction for more details about how educators can qualify for this deduction.