Tax Benefits

There are two tax credits for college and two tax deductions available to families incurring college expenses. The tax credits are the American Opportunity Credit and the Lifetime Learning Tax Credit. The tax deductions are called the Tuition and Fees tax deduction and the Student Loan Interest tax deduction. The IRS published guidance for these programs is in Publication 970 (2011).

American Opportunity Credit

The American Opportunity Credit is not a scholarship. It is a tax credit, which means it can reduce the amount of tax you owe dollar for dollar. The American Opportunity tax credit has the following conditions attached to the program. (Note: This is not an exhaustive list. Do not rely on it solely. Go the IRS Publication 970 (2011) for details.)

Overview of the American Opportunity Credit (Reference: 2011 IRS Publication 970)

Maximum credit Up to $2,500 credit per eligible student
Limit on modified adjusted gross income (MAGI) $160,000 if married filing jointly; $80,000 if single, head of household, or qualifying widow(er) Updated 11/6/12 ref: IRS.gov
Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable
Number of years of postsecondary education Available ONLY for the first 4 years of postsecondary education
Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope credit was claimed)
Type of degree required Student must be pursuing an undergraduate degree or other recognized education credential
Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year
Felony drug conviction No felony drug convictions on student's records
Qualified expenses Tuition and fees required for enrollment. Course-related books, supplies, and equipment do not need to be purchased from the institution in order to qualify.
Payments for academic periods Payments made in 2012 for academic periods beginning in 2012 and in the first 3 months of 2013
  • IRS form 8863 is used to claim the credit.

Lifetime Learning Credit

The Lifetime Learning credit is very similar to the Hope Scholarship credit, except that it can be used for any student at any grade level...even graduate students. . It is a tax credit, which means it can reduce the amount of tax you owe dollar for dollar. The Lifetime Learning Credit cannot be used in conjunction with the Hope or American Opportunity Credit in the same year (Reference: IRS Tax Updates). The Lifetime Learning tax credit has the following conditions attached to the program. (Note: This is not an exhaustive list. Do not rely on it solely. Go the IRS Publication 970 (2011) for definitions and details.)

Overview of the Lifetime Learning Credit (Reference: 2011 IRS Publication 970)

Maximum credit Up to $2,000 credit per return
Limit on modified adjusted gross income (MAGI) $120,000 if married filing jointly; $60,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income
Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills
Number of tax years credit available Available for an unlimited number of years
Type of degree required Student does not need to be pursuing a degree or other recognized education credential
Number of courses Available for one or more courses
Felony drug conviction Felony drug convictions are permitted
Qualified expenses Tuition and fees required for enrollment (including amounts required to be paid to the institution for course-related books, supplies, and equipment)
Payments for academic periods Payments made in 2012 for academic periods beginning in 2012 and in the first 3 months of 2013
  • IRS form 8863 is used to claim the credit.

Student Loan Interest Tax Deduction

Student loan interest is tax deductible up to $2,500 a year. A lender should send the borrower Form 1098-E if more than $600 in interest was paid during the tax year. Here are additional qualifiers for the deduction. (Note: This is not an exhaustive list. Do not rely on it solely. Go the IRS Publication 970 for definitions and details.)

Overview of the Student Loan Interest Tax Deduction (Reference: 2011 IRS Publication 970)

Maximum benefit You can reduce your income subject to tax by up to $2,500.
Loan qualifications Your student loan:
  • must have been taken out solely to pay qualified education expenses, and
  • cannot be from a related person or made under a qualified employer plan.
Student qualifications The student must be:
  • you, your spouse, or your dependent, and
  • enrolled at least half-time in a degree program.
Time limit on deduction You can deduct interest paid during the remaining period of your student loan.
Limit on modified adjusted gross income (MAGI) $150,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er).
  • Report the deduction under Adjustment to Income on the 1040, 1040A, 1040NR or 1040EZ tax return.

Tuition and Fees Tax Deduction

Tuition and fees are tax deductible up to $4,000 a year, if you do not qualify for or claim the American Opportunity or Lifetime Learning Tax Credits. The deduction may be taken as an adjustment to income, without having to file a Schedule A – Itemized Deductions, (Note: This is not an exhaustive list. Do not rely on it solely. Go the IRS Publication 970 for definitions and details.)

Overview of the Tuition and Fees Tax Deduction (Reference: 2011 IRS Publication 970)

What is the maximum benefit? You can reduce your income subject to tax by up to $4,000.
Limit on modified adjusted gross income (MAGI) $160,000 if married filing a joint return; $80,000 if single, head of household, or qualifying widow(er)
Where is the deduction taken? As an adjustment to income on Form 1040 or Form 1040A.
For whom must the expenses be paid? A student enrolled in an eligible educational institution that is either:
  • you
  • your spouse, or
  • your dependent for whom you claim an exemption.
What tuition and fees are deductible? Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board. Books, supplies, and equipment are only included IF they must be paid to the institution as a condition of enrollment.
  • IRS Form 8917 is used to claim the deduction.

Who Cannot Claim the Deduction

You cannot claim the tuition and fees deduction if any of the following apply.

  • Your filing status is married filing separately.
  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
  • You (or your spouse) were a nonresident alien for any part of 2012 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
  • You or anyone else claims an American opportunity or lifetime learning credit in 2012 with respect to expenses of the student for whom the qualified education expenses were paid.