Do You Qualify for Education Tax Breaks in 2017?

By Matthew Frankel Markets Fool.com

Admittedly, higher education costs have risen tremendously over the past few decades, to a point where fewer and fewer people would use the words "college" and "affordable" in the same sentence. However, there are several tax breaks for education that are designed to take some of this burden off the shoulders of American families. Here's an overview of the tax breaks you might be able to qualify for both during and after your higher education career and the requirements for each.

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3 tax breaks for tuition

If you've paid tuition in 2017, or are planning to do so, there are three possible tax breaks you may be able to qualify for. Two are tax credits, which reduce your overall tax bill dollar-for-dollar, and one is a deduction. In order of most valuable to least, here are the three tax breaks for paying tuition, and a discussion of the requirements to qualify for each one.

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1. The American Opportunity Tax Credit

While the American Opportunity Tax Credit is the most valuable of these three tax breaks, it's also the toughest to qualify for. If you can get it, the credit is worth as much as $2,500 a year per student for up to four years.

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In order to take the credit, the student must be enrolled in a degree or certificate program and must be taking classes on at least a half-time basis and have no felony drug convictions. Additionally, the credit can only be applied to the first four years of postsecondary education. If a student has already completed four years of college, he or she is no longer eligible, regardless of whether the credit was used for those four years.

Finally, the credit phases out above modified adjusted gross income (MAGI) of $80,000 for single taxpayers and $160,000 for married couples filing jointly and disappears completely above MAGI thresholds of $90,000 and $180,000, respectively.

If you meet the strict requirements, the American Opportunity Tax Credit is worth 100% of the first $2,000 of qualifying education expenses and 25% of the next $2,000. Effectively, if you pay $4,000 or more in tuition and other qualifying expenses, the government will give $2,500 of it back.

2. The Lifetime Learning Credit

The Lifetime Learning Credit is designed for low- to middle-income taxpayers who paid qualifying education expenses but cannot meet the requirements of the American Opportunity Tax Credit.

Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit does not require the student to be pursuing a degree, attending classes at least half-time, or are within the first four years of higher education. In other words, you can take a single college course just because you felt like it and claim the Lifetime Learning Credit. However, the MAGI phase-out thresholds are significantly lower, at $55,000-$65,000 (single) and $110,000-$130,000 (married filing jointly).

If you qualify, the credit is worth 20% of up to $10,000 in qualified tuition expenses per year. Another important distinction is that this limit is per return, not per student. The maximum credit of $2,000 isn't that much different from the American Opportunity Tax Credit, but you'll have to spend more to get the full amount.

3. The Tuition and Fees Deduction

Finally, there is a deduction for tuition and fees, which is generally used by taxpayers who would otherwise qualify for the Lifetime Learning Credit but whose incomes are too high. The deduction has significantly higher phase-out thresholds than the Lifetime Learning Credit, at $65,000-$80,000 (single) and $130,000-$160,000 (married filing jointly).

The deduction allows you to exclude up to $4,000 in qualifying tuition and fee expenses from your income, so the maximum benefit depends on your tax bracket. If you're in the 25% marginal tax bracket, for example, this translates to up to $1,000 less in tax liability. Also keep in mind that this is an above-the-line tax deduction, meaning that you can take it even if you don't itemize.

It's important to mention that for all of these tax breaks, the IRS wants you to use the amount you paid during the calendar year, not the amounts billed by the school. Specifically, if your classes start during the first three months of 2018, but you pay the bill in 2017, you can use this to figure your 2017 tax breaks.

A tax break for student loan borrowers

Once you're done attending school, if you find yourself with a bunch of student loan debt, there's another tax break designed to make the burden of repaying them just a little easier.

The student loan interest deduction allows you to deduct the actual amount of interest you paid on your qualified student loans, up to $2,500. Like the tuition and fees deduction, this is an above-the-line deduction, so you can take it regardless of whether you itemize or not.

For the purposes of this deduction, your student loan qualifies if it was taken out for the sole purpose of paying for qualified higher education expenses within a reasonable time frame after the loan was taken out.

The deduction has the same MAGI phase-out thresholds as the tuition and fees deduction, of $65,000-$80,000 for singles and $130,000-$160,000 for married joint filers.

College is expensive, but these tax breaks can help

The bottom line is that while higher education can be extremely expensive, these tax breaks can certainly make it more affordable.

For example, the average cost of tuition and fees at an in-state university is $9,650 as of the 2016-2017 school year. Thanks to the American Opportunity Tax Credit, the average person paying in-state tuition can get 26% of this cost back for four years.

Personally, I'm currently taking classes to obtain my CFP (Certified Financial Planner) certification, and plan to take advantage of one of the other two tuition tax breaks this year. And since I have more than a couple of student loans between my undergraduate and graduate degrees, I plan to deduct my student loan interest as well.

The point is that when you're planning the cost of higher education, be sure to know the tax benefits you can expect to qualify for, as they could put thousands of dollars back in your pocket.

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