Tax Benefits for Education Costs

Attention college students and their parents: There are two tax credits offered for postsecondary education.

Money used toward tuition, course materials, fees, books, and equipment can be considered for either the American Opportunity Credit or the Lifetime Learning Credit. Money spent on room and board is not eligible for either tax credit.

Almost every college, university, vocational school or other postsecondary institution eligible to participate in a student aid program administered by the Department of Education qualifies. Even some foreign schools qualify. In fact, the school should be able to tell you whether attendance at their institution makes you eligible to take either credit.

You can’t take both credits for one student, but you may find that one may be more advantageous than the other depending on your circumstances.

Students cannot qualify to take the credit on their return if they are declared as a dependent on a parent’s income tax return. And parents can’t take the credit if their income exceeds the limits prescribed by law. So it sometimes seems that if you can afford to put your kid through college, you don’t qualify for the education credits. Also know that you cannot claim the credit if your filing status is married filing separately.

There are different qualifiers for each credit, so we will look at each one individually:

The American Opportunity Credit.

This is available to postsecondary education students for only four years while working toward a degree or other recognized education credential. If a student is just taking classes with no goal for a degree, he does not qualify for this credit. The credit is up to $2,500 per eligible student, and if the credit exceeds the tax liability for the year, 40% of the remainder may be refundable.

Income limitations are $180,000 married filing jointly and $90,000 if single or head of household.

To claim the credit, the student must be enrolled at least half time for at least one academic period during the school year, and can’t have a felony drug conviction as of the end of that tax year.

The Lifetime Learning Credit

This credit is available to everyone—there are no restrictions on age, number of classes or degree requirements.

You could be working on your Masters or doctorate, or simply taking a class for pleasure or to advance your career.

The amount of credit available is $2,000 per tax return (you get ripped if you have more than one kid in school). Here’s the bad news: this credit is not refundable. So if your tax liability is only $500, the maximum credit you will receive will be $500.

Income limitations are $122,000 if married filing jointly and $61,000 for single or head of household.

Also note that the Lifetime Learning Credit covers tuition and fees. Here’s where the requirements are stricter than the American Opportunity Credit: Included for consideration in the credit are expenditures for course materials, books, supplies and equipment required by instructors or the institution.  If you are allowed to purchase any of these items from other sources, the costs will not qualify.

Only payments made during the year qualify for the credit--if the payment is intended for the first three months of the subsequent tax year. The IRS allows you to claim the credit even if the qualifying payments were made with borrowed funds – like from grandma or from a student loan.

You cannot deduct the cost of education as a business expense and also take the credit, too.

You may also be required to reduce the total of education expenditures by any amounts received as tax free educational assistance, such as Pell Grants.

For more information about education credits check out these tax tips on the IRS website: Tax Tips for Education Credits.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook