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Guide to Education Tax Credit Deductions

Guide to Education Tax Credit Deductions
Chris Alexis
Chris AlexisUpdated March 23, 2023
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There’s no way around it, paying for college can be expensive. And while reviewing those numbers can feel overwhelming, you may find some relief in the form of educational tax credits and deductions.This way, you can look forward to some of the money you’ve shelled out boomeranging back. But first, it’s important to understand the details of what the government offers with these college tax credits and what it takes to qualify. 

What Is an Education Tax Credit?

A tax credit lowers the income tax you owe to your state and federal governments. It is designed to incentivize actions the government deems worthy.In this case, education.These educational tax credits come to you after you report the amount of money you spent on higher education (whether your own, your spouse’s, or your dependent’s), and the government uses that information to ease your tax obligations accordingly.

 How Do Educational Tax Credits Work?

The university or other educational center should have what’s called a Form 1098-T. It’s a statement that lists the education expenses you have paid for that year. Fill out that form and include it in your tax return filing.You will also need to fill out the proper forms provided by the IRS to document your specific expenses. You will need to make sure everything is filled out correctly to receive your college tax credit.

Qualifications for Education Tax Credit Deductions

The qualifications depend on the type of education tax credit you’re seeking. Whether that means you must be a taxpayer funding your education (or that of a spouse or dependent); someone paying qualified student loans; or a teacher funding classroom expenses, it all depends on the specific opportunity.

Types of Educational Tax Credit Deductions

Educational tax credit deductions include a lifetime learning credit, American opportunity tax credit, student loan interest deduction, and educator expense deduction.

Lifetime Learning Credit

This education tax credit is worth 20% of your first $10,000 in qualifying expenses. That means you can get a credit of up to a maximum of $2,000 credit per tax return.Qualifying expenses include fees and tuition.To be eligible, you must be a taxpayer who foots the bill for your education— or that of your spouse or dependent. There is an income cap, which is $90,000 for a single filer and $180,000 for joint filers. (A quick note: The amount of credit is gradually diminished, starting at $80,000 (single filers) or $160,000 (joint filers).As the name implies, there is no limit on how many times you can use it. As an example, you apply it to your undergraduate degree and then do it again for your graduate studies.Should you return to college 20 years later for another degree, you could use it again.Another important fact to keep in mind: You do not have to be working toward a degree to take advantage of this opportunity. You can also put it toward expenses paid to a recognized educational credential or if you’re looking to upgrade your job skills at an eligible educational institution.According to the IRS, an eligible educational institution is a “school offering higher education beyond high school. It is any college, university, trade school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.”A word of caution: You can’t get credit for expenses you didn’t pay out of your pocket. This means things like fellowships, scholarships, Pell Grants, employer tuition assistance, school refunds, or other nontaxable assistance.The same applies to distributions from a 529 plan, Coverdell education savings account, or savings bond.Recommended: Do Student Loans Count As Income?

American Opportunity Tax Credit

This is only for the first four years of postsecondary education.It offers an education tax credit for a variety of qualifying expenses, which include tuition and fees,  books, supplies, and other equipment—with the caveat that these items are required for enrollment.This credit maxes out at $2,500. To break it down, it credits 100% of the first $2,000 for qualified expenses. The other $500 comes from crediting 25% of the next $2,000 spent.Here’s the fine print: Only 40% of this credit is refundable on your taxes. In other words, if the credit takes what you owe in taxes down to nothing, then only $1,000 of that credit can be included in your refund.Like the lifetime learning credit opportunity, it’s also aimed at taxpayers who pay qualified educational expenses for themselves, their spouse, or a dependent. It also has the same income gap: $90,000 for a single filer, and joint filers at $180,000.

Student Loan Interest Deduction

As the name implies, this education tax credit addresses what you’ve spent on student loan interest each tax year.Should you qualify, you can deduct up to $2,500 if you’re a taxpayer who pays interest on qualified loans that you are legally obligated to reimburse.The income cap here is $85,000 for a single filer and $175,000 for joint filers. (Quick note: deduction amounts are phased out for MAGIs (modified adjusted gross income) when the number hits over $70,000 (for single filers) $145,000 (for joint filers).Be on the lookout for a form from your student loan servicer or lender showing how much you paid in interest during the previous year. (It’s always important to know this, along with your balance.) You can use this information to calculate the value of your deduction. You will get this form if you have paid more than $600 in interest during the previous year.

Educator Expense Deduction

While the other opportunities have focused on postsecondary education, this is a different kind of education tax break. It applies only to educators who work with K-12 students. On top of that, qualifying teachers are those who pay unreimbursed eligible expenses for their classrooms. This opportunity maxes out at $250 in taxable income reduction.Those eligible expenses include classroom supplies, books, technology, and computer software used to educate students. Qualifying teachers must also work for an eligible school (based on their state’s law) and complete at least 900 hours of work during the school year.

Claiming Educational Expenses on Your Taxes

To earn your education tax break, you must fill out the correct forms, which will be included in your tax filing.For example, you will need to download and fill out Form 8863  for both American opportunity and lifetime learning credits. Once completed, attach this to Form 1040 or 1040-SR when completing your tax paperwork.(If you hire an account or other tax professional, they will do this for you.)The student loan interest deduction is an adjustment to the income you declare. To claim this deduction, enter the allowable amount on Schedule 1 (Form 1040), line 21.For the educator expense dedication, you can claim it on Form 1040, Form 1040-SR, or Form 1040-NR (attach Schedule 1 (Form 1040).

How Much Can You Deduct on Taxes for Student Loans?

The maximum is $2,500 a year.You can obtain a tax deduction for interest paid on student loans that you took out for yourself, your spouse, or a dependent.Special note: This applies to all loans used to pay for higher education expenses—not just federal student loans. 

The Takeaway

The government supports people pursuing their schooling and will allow tax relief to further encourage it by offering educational tax credits to those who qualify.  Keep track of your expenses, and if you qualify for opportunities, pursue them.Options for relief include the lifetime learning credit, the American opportunity tax credit, and the student loan interest deduction. If you’re the one doing the educating in a K-12 school and you meet the qualifications, there is also tax relief available for you.Make sure you track down the correct forms so you can attach them when it comes time to file your taxes for the year.  It is very important to have everything filled out correctly and accurately to receive your college tax credit. 

3 Student Loan Tips 

  1. Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
  2. Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
  3. If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for federal student loan forgiveness.

Frequently Asked Questions

How do I qualify for an education tax credit?
How do I claim education expenses on my taxes?
How can I get a $2,500 education tax credit?
Photo credit: iStock/hobo_018

About the Author

Chris Alexis

Chris Alexis

Chris Alexis has been putting pen to paper and fingertips to keyboard since his youth. He ultimately grew into an accomplished and award-winning writer who loves using the power of language to connect with audiences. He also strongly enjoys learning about who he is writing for so he can create something that will truly resonate with them. He has worked for a variety of companies, each of which have given him more experience and insight.
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