Tax Breaks for Education

Studies by the Government Accounting Office (GAO) show that many taxpayers who are eligible for education related tax relief don’t take advantage of it. The key reasons are: TZ1

There are too many programs. If one includes tax credits, expense deductions, and special savings programs, there are more than ten different tax breaks for education.

The rules vary. Each educational tax break comes with a different set of rules. Different qualifying income levels, the age of a student, the level of education, the timing of expenses and their interrelationship all make navigation of your options complex.

To help clarify your options here are three of the most popular educational tax breaks and some related tips.

TZ2American Opportunity Tax Credit (AOTC). This is a maximum $2,500 credit for a student who could be you, a spouse, or a dependent of yours. The student must be enrolled at least half-time and the credit is available for up to four years of post-secondary education (college). This credit is a per student credit and may be refundable for up to 40% of the credit amount.
Income limit: $90,000 single; $180,000 married filing joint

TZ2Lifetime Learning Credit (LLC). The LLC is a maximum annual per taxpayer credit of $2,000. It is available to a student who is you, your spouse or a dependent. It covers any stage of post-secondary education as long as the student is enrolled in courses that lead to a degree, certificate or credential. The credit applies to 20% of the first $10,000 in qualified expenses.
Income limit: $65,000 single; $130,000 married filing joint

TZ2Tuition and Fees Deduction. This on again, off again tax benefit is still available for your 2014 tax return. While not currently available for 2015, this deduction has been extended so many times, that it may be extended once again. This deduction can cut as much as $4,000 off your taxable income.

Which is right for you?

Determining which program is right for you takes tax planning. Remember you may not double dip expenses OR programs. This means you may not use the same qualified educational expense for multiple programs (including applying the expense to any scholarship or other benefit). However, if you have more than one student, you can apply different programs to different students. Other considerations;

TZ3The LLC is per taxpayer while the AOTC is per student.

TZ3The income limitations are highest for AOTC.

TZ3If considering graduate studies, you may wish to first use the AOTC as it is limited to four years of post-secondary studies.

TZ3The LLC and AOTC are almost always a better option than the Tuition and Fees deduction. This is because a tax “credit” directly reduces tax, while the deduction reduces income.

TZ3Remember there are other educational tax benefits. Some of these other programs include student loan interest deductions, using Coverdell Savings or 529 Savings programs, employer educational assistance, and special deductibility of certain US savings bonds.