Student Tax Deductions and Education Credits
Navigate the tax rules for higher education to lower your tax bill. Learn how to properly document expenses and claim the valuable savings you are entitled to.
The federal tax code provides several benefits for students and their families to help manage education expenses. These tax-saving opportunities can reduce the amount of tax owed for those paying for higher education for themselves, a spouse, or a dependent.
Understanding Tax Credits vs Deductions
Understanding education tax benefits requires knowing the difference between a tax credit and a tax deduction. A tax deduction reduces your taxable income, the portion of your income subject to tax. The value of a deduction depends on your marginal tax rate; for example, a $1,000 deduction saves $220 for someone in the 22% tax bracket.
A tax credit is a dollar-for-dollar reduction of your final tax liability. If you owe $3,000 in taxes and have a $1,000 tax credit, your bill is lowered to $2,000, making credits more valuable than deductions of the same amount.
Some credits are refundable, meaning you can receive the difference as a refund if the credit is larger than your tax liability. Nonrefundable credits can only reduce your tax liability to zero; you do not get any portion of the credit back as a refund if it exceeds what you owe.
Major Education Tax Credits
The two primary tax credits for higher education are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). A taxpayer can only claim one of these credits per student per year, so it is important to determine which offers the greater benefit based on enrollment status, year in school, and qualified expenses.
The AOTC is for students in their first four years of postsecondary education. For 2024, it offers a maximum annual credit of $2,500 per student, calculated as 100% of the first $2,000 in qualified expenses and 25% of the next $2,000. Qualified expenses include tuition, fees, and course materials. The AOTC is partially refundable, with 40% of the credit, up to $1,000, available as a refund.
The Lifetime Learning Credit is broader and can be claimed for undergraduate, graduate, and professional degree courses for an unlimited number of years. The LLC is a nonrefundable credit worth 20% of the first $10,000 in qualified expenses, up to a maximum of $2,000 per tax return, not per student. For the LLC, qualified expenses are limited to tuition and fees required for enrollment.
For 2024, both the AOTC and LLC have the same income limitations. To claim the full credit, a taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less for single filers and $160,000 or less for joint filers. The credits phase out completely at a MAGI of $90,000 for single filers and $180,000 for joint filers.
The Student Loan Interest Deduction
The tax code also allows for a deduction for interest paid on student loans. This benefit allows taxpayers to deduct either the amount of interest paid during the year or $2,500, whichever is less. This is an “above-the-line” deduction, meaning you can claim it even if you do not itemize and take the standard deduction.
To qualify, the loan must be a qualified student loan used for education expenses for the taxpayer, their spouse, or a dependent. The taxpayer must be legally obligated to pay the loan and cannot be claimed as a dependent on another person’s return.
For the 2024 tax year, this deduction begins to phase out for single filers with a modified adjusted gross income (MAGI) above $80,000 and is eliminated at $95,000. For those married filing jointly, the phase-out range is between $165,000 and $195,000.
Required Information and Forms
To claim education tax benefits, you will need specific documents from the educational institution and your loan servicer. Your school provides Form 1098-T, Tuition Statement, which reports payments received for qualified tuition and related expenses. This form is used to substantiate expenses for either the AOTC or the LLC.
If you paid student loan interest, your loan servicer will send Form 1098-E, Student Loan Interest Statement, which shows the total interest you paid. You will only receive this form if you paid $600 or more in interest, but smaller amounts can still be deducted if verified with your lender. You should also keep records for other qualified expenses not on Form 1098-T, such as textbooks or supplies that may be eligible for the AOTC.
How to Claim Your Education Benefits
The student loan interest deduction is claimed directly on Schedule 1 of Form 1040. To claim the American Opportunity Tax Credit or the Lifetime Learning Credit, you must complete and attach Form 8863, Education Credits, to your Form 1040.
You will use the information from Form 1098-T and your own records to calculate the credit on this form. Whether filing electronically or by mail, Schedule 1 and Form 8863 must be included with your tax return if you are claiming these benefits.