With the cost of college expensive for many, receiving a tax break from the IRS for college-related expenses may be appealing. 529 Plans and Coverdell Education Savings Accounts (ESAs) offer tax-advantaged withdrawals when used for qualified expenses.
But for those seeking an additional tax deduction on their tax return, there are specific tax credits that students and their parents may qualify for. However, many tax credits come with rules, so you must work with your tax and financial professional to determine which applies to your situation. Here are the tax credits you may qualify for in 2023 or the future, pending no changes in IRS education expenses deduction rules:
1. The American Opportunity Tax Credit (AOTC)
This tax credit is for single tax filers with an income less than $80,000 (phase out is $80-$90,000) and for married couples filing jointly with a combined income of less than $160,000 (phase out is $160-$180,000). There are other specifics to this tax credit:
- Students must attend college at least half-time.
- The same student can claim the tax credit for up to four years.
- The student must be an undergraduate and not have completed all four college years.
Here’s how the credit works:
Eligible taxpayers (the student, parent, or spouse) can claim the credit for 100% of the first $2000 spent on qualified education expenses. Tuition, fees, and textbooks are qualified expenses; room and board, meals, insurance, etc., are not.
Eligible taxpayers can claim 25% of the next $2000 for up to a maximum of $2500 for each qualifying student. If the credit amount exceeds the tax you owe for the year, you’ll get a refund of up to 40% of the remaining amount ($1000) for each qualifying student.
2. The Lifetime Learning Credit (LLC)
This credit is available to the student and is up to $2000 per tax return, regardless of if they are an undergraduate or graduate student. Also, they can claim the tax credit if attending part-time or full-time, which can be claimed for unlimited years, so long as they’re still attending college. Income limits to apply to this credit:
The LLC phases out for single incomes of $59,000 to $69,000 or married taxpayers filing jointly with a combined income of $118,000 to $138,000.
The AOTC and the Lifetime Learning Credit are mutually exclusive, so you can only claim one of the same student’s expenses within the same tax year.
3. Earned Income Tax Credit (EITC)
The EITC isn’t exclusive to education but can be used for education expenses. Note that this credit is available to lower-income earners, so consult your tax professional to determine if you qualify based on income. Here are other things to note about this tax credit:
- If the student is listed as a dependent on someone else’s tax return, they can’t qualify.
- Qualification for the EITC depends on income, number of dependents, and marital status.
- Recent graduates with lower income and no dependents may qualify.
4. Tax credits for scholarships, grants, or fellowships
If the student attends an eligible educational institution and receives a scholarship, grant, or fellowship, the award amount is not considered income for tax purposes. However, to receive the tax benefit, the award must be used for qualified education-related expenses such as:
- Tuition and fees.
- Books and supplies.
- Equipment required to meet a class requirement or obtain a degree.
It’s important to know that any awards that exceed the qualified education-related expenses amount will be considered taxable income.
5. Student loan interest deduction
Student loan interest may be deductible regardless of whether you itemize when filing your taxes. However, how much you can deduct depends on your modified adjusted gross income (AGI), with the maximum deduction being $2500. Single filers with a modified AGI between $70,000 and $85,000 and joint filers with a modified AGI between $145,000 and $175,000 should visit their tax professional to see if they can take this deduction.
Married couples filing separately and those listed as someone’s dependent on a tax return are not eligible for this deduction.
Claiming a tax credit or deduction can help reduce the cost of education but ensure that you qualify by visiting your financial and tax professionals before filing your taxes.
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