If you are headed back to school as an adult, it’s nice to know you’ll get more out of it than an education. You could also save money on your taxes.
That’s right, Uncle Sam has some tax credits and deductions for those deciding to pursue a degree or some more schooling.
Let’s walk through it.
Credits vs. Deductions
A credit reduces your tax bill dollar for dollar. So, if you have a credit of $500, the IRS lets you subtract $500 from the taxes you owe. Credits are more valuable than deductions because of this. If you’re lucky, the credit is refundable, meaning it adds to your refund if you don’t owe taxes.
A deduction reduces the amount of your taxable income. Deducting that same $500 from your taxable income won’t provide the same savings as a credit, but it does lower your tax bill somewhat.
Eligible Educational Institutions and Eligible Students
The school and the student must be eligible for the credit or deduction. And not all expenses are eligible for a credit or a deduction.
An eligible educational institution is:
- A school offering higher education beyond high school (also called post-secondary education)
- Any college, university, trade school, or other post-secondary educational institution eligible to participate in a student aid program run by the Department of Education
- Most accredited public, nonprofit, and privately owned for-profit post-secondary institutions
An eligible student is designated primarily for the American Opportunity Tax Credit (AOTC) and means someone who:
- Was enrolled at least half-time in a program leading toward a degree, certificate, or another recognized educational credential for at least one academic period during the year
- Has not completed the first four years of post-secondary education at the beginning of the tax year
- Has not claimed or someone else has not claimed the credit for the student for more than four years
- Was not convicted of a federal or state felony drug offense by the end of the tax year
Most students in the US on an F-1 Student Visa are not eligible for the AOTC. Generally, non-resident aliens are not eligible to claim any tax credits.
The exception is if the non-resident alien is married and chooses to file a joint return with a US citizen or resident spouse. Or they are a Dual-Status Alien who elects to be treated as a US resident for the entire tax year.
There is a slight difference between the American Opportunity Tax Credit and the Lifetime Learning Credit.
If you can claim the AOTC, you can use it for course-related books, supplies, and equipment that you didn’t necessarily pay the educational institution to obtain but that are required for attendance. The same cannot be said for the Lifetime Learning Credit.
You can only claim the AOTC for the first four years, while the LLC has no such limitation.
The total of all qualified tuition and related expenses used for calculating the AOTC cannot exceed $4,000, and the maximum allowable credit is $2,500.
Available Educational Tax Credits
There are two education tax credits. The first and most valuable one is the American Opportunity Tax Credit, formerly known as the Hope Credit.
American Opportunity Tax Credit
The AOTC is a partially refundable tax credit. It allows up to 40% of the credit as a tax payment if you are qualified to claim it. You could receive up to $1,000 per eligible student as a tax refund, even if you owe no taxes.
The AOTC is only available for the first four years of post-secondary school. If you attended an eligible institution for two years around age 20 and then waited until you were 60 to complete your degree, you could still qualify for another two years credit toward your taxes.
With the American Opportunity Credit, you can claim up to $1,500 per eligible student per year.
Here are the mechanics of how the tax credit works. The credit covers 100% of the first $2,000 of qualified tuition and expenses and 25% of the next $2,000. Each student for whom you claim the credit must have been enrolled at least half time for at least one academic period beginning in the 2021 tax year for your 2021 filing.
There is an income limitation calculated by your modified adjusted gross income (MAGI).
- $180,000 when married filing jointly
- $90,000 when filing singly, for head of household, or as a qualifying widow(er)
You can claim the credit for educational expenses you paid yourself, for your spouse, or for a qualifying dependent. You may not claim it if you are claimed as a dependent by someone else. If you have a felony drug conviction that year, you are disqualified.
Lifelong Learning Credit
What if you already got your four years of college? You may still qualify for the Lifelong Learning Credit or LLC.
The LLC is a non-refundable tax credit, so you don’t get any of it as part of your tax refund if you receive one. The credit applies to graduate, undergraduate, and professional degree courses and post-secondary courses taken to improve your job skills.
There is no limit on the number of years you can claim this credit, and you can claim up to $2,000 per eligible student per year.
It works this way — the credit will be 20% of the first $10,000 of combined post-secondary tuition and fees paid, totaling not more than $2,000 per year (total, not per student). Income limits apply:
- $136,000 (in 2020) or $139,000 (in 2021) if married filing jointly
- $68,000 (in 2020) or $69,000 (in 2021) if filing as single, head of household, or qualified widow(er)
You can claim qualified expenses for yourself (if you are not someone else’s dependent), your spouse, or your own qualified dependent. For the LLC, a felony drug conviction doesn’t disqualify you from claiming the credit.
You cannot claim both credits for the same student in the same year. You can claim one credit for one student and the other for another, or you can claim the same credit for each.
As we said above, tax deductions aren’t as valuable as credits, but they are something, which is better than nothing.
The Student Loan Interest Deduction may be able to deduct up to $2,500 of student loan interest paid during the tax year. It must be paid on a qualified student loan, and the student must be enrolled at least half the time.
It doesn’t count if you borrowed from Mom and Dad, Grandpa, or Great Aunt Lillian. Anyone related by blood or half-blood cannot be a qualified student lender. Neither can certain corporations, partnerships, trusts, or exempt organizations.
If you are self-employed, you can deduct business expenses directly from your self-employment income, reducing the amount subject to your income tax and your self-employment tax.
Yep, education is a beautiful thing. Thankfully, the IRS thinks so, too, and eligible students going to eligible institutions can claim either the American Opportunity Tax Credit or the Lifelong Learning Credit.
If not qualified for either of those, you may be able to take a deduction at least.
Just be sure to follow all the rules before you sign your return.