College tax credits and tax breaks every student should know

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor.

College is getting even more expensive, public financial aid isn’t keeping pace, and parents and students continue to look for ways to offset the costs of college.

One solution may lie in your tax return. Claiming college tax credits and deductions can help defray the costs of certain expenses, such as tuition, fees, books and supplies.

These credits are Uncle Sam’s way of helping you invest in your education. You could save up to a few thousand dollars on your taxes each year if you qualify for tax breaks.

“To get an extra $2,500 is always a bonus for people,” says Joe Orsolini, president of College Aid Planners. “It’s definitely something that helps out families that they do have that available.”

Still, it’s important to follow IRS guidelines on who’s eligible and how to claim the tax breaks. Here’s how the American opportunity tax credit, lifetime learning tax credit, student loan interest deduction, earned income tax credit, and the tuition and fees deduction could potentially benefit you.

• American opportunity tax credit
• Lifetime learning credit
• Student loan interest deduction
• Earned income tax credit
• Tuition and fees deduction

American opportunity tax credit

This credit can help a lot because you may get a small refund back and you “get four bites of the apple,” Orsolini says — meaning you can claim the credit for the first four years of college education.

How it works

You can claim the American opportunity tax credit for each eligible student.

If you qualify, you could get a credit for 100% of the first $2,000 of qualified education expenses that you paid, plus 25% of the next $2,000, for a total of $2,500 per student. If the credit reduces your tax liability to zero, the IRS refunds 40% of the remaining amount (up to $1,000) back to you.

Who’s eligible?

You can claim this credit for yourself, your spouse or your dependent.

To claim the full credit, your modified adjusted gross income (or MAGI) must be $80,000 or less if your tax status is single, or $160,000 or less if your status is married filing jointly. If your MAGI is over $80,000 and less than $90,000 for an individual, or more than $160,000 and less than $180,000 for a married couple filing jointly, you may be eligible for a reduced credit. You can’t claim the credit at all if your MAGI exceeds $90,000 as an individual, or $180,000 as a married couple filing jointly.

To qualify for this credit, the student must …

• Be within their first four years of post-secondary education
• Take classes at least half time
• Be pursuing a degree or educational certificate
• Not have claimed the AOTC or the former Hope credit for more than four tax years
• Have no felony drug convictions

Lifetime learning credit

This credit is ideal for students who have already completed four years of post-secondary education and who are looking to get a higher degree, or people looking to maintain or improve their job skills.

How does it work?

You can claim 20% of up to $10,000 of qualified education expenses paid for an eligible student. The lifetime learning credit can only be used once per tax return, for a max of $2,000, and it’s nonrefundable. However, there’s no limit on the number of years you can claim the lifetime learning credit.

Who’s eligible?

This credit can be used for you, your spouse or a dependent provided the student meets all qualifications for claiming the credit

The student must be …

● Enrolled at an eligible educational institution for at least one academic period during the tax year
● Taking courses for the following: a higher education degree, a recognized vocational credential or job-skills improvement

Income requirements

Income requirements are tighter here than for the American opportunity tax credit. To be eligible for the full credit, your MAGI must be less than $58,000 or less if you file as single, or less than $116,000 if you are married filing jointly. Single filers with MAGI of more than $58,00 but less than $68,000, and joint filers with MAGI of more than $116,000 to less than $136,000, may qualify for a partial credit.

You can’t claim the credit at all if your MAGI is $68,000 or more as a single filer, or $136,000 or more as a joint filer. And people who are married filing separately can’t claim the credit at all.

Do I have to pay taxes on scholarship money?

Scholarships are funds awarded to students, based on need or merit, to pay for educational costs. Generally, scholarship money is tax-free if you meet certain criteria. For example, the funds must be used to pay qualified expenses at an eligible educational institution.

But if your scholarship doesn’t meet the requirements, you could be on the hook to pay taxes on some or all the money you received.

Student loan interest deduction

If you’re repaying a private or federal student loan, the student loan interest deduction could help offset the costs of the interest you pay.

How does it work?

This deduction will lower the amount of your income subject to taxes. As long as the loan was initially borrowed to pay for qualified education expenses, you may be able to claim up to $2,500 of interest paid on the loan. You can claim that interest every year until the loan is paid off.

Who’s eligible?

To claim this deduction, the IRS says you must be the person who is legally obligated to pay the interest on the loan, even if someone else made payments for you.

To be eligible for the full credit, your MAGI must be less than $70,000 if you file as single, or less than $140,000 if you file a joint return. The credit phases out as your MAGI increases. And once your MAGI is $85,000 or more filing single, or $170,000 or more filing jointly, you’re not eligible for the credit at all. It’s possible the MAGI requirements could change in the future. And you must also meet additional eligibility requirements to take this deduction.

Earned income tax credit

Although not an education credit, the earned income tax credit is designed to benefit people with modest incomes. The credit will be worth the most for families with multiple qualifying children. However, recent graduates with low income and no children can qualify, too.

How does it work?

Depending on your filing status and the number of children you have, this credit is worth between $538 and $6,660. It’s also a refundable credit, so it could possibly get you a refund, even if the credit will reduce your federal income tax obligation to zero.

Here are the 2020 income thresholds and maximum credit amounts based on filing status and number of qualifying children.

Who’s eligible?

Generally, you must have income from earnings and meet certain basic rules and income limits. If you have children, they must meet qualifications, too. The IRS EITC Assistant can help you check whether you qualify.

Tuition and fees deduction — maybe

This deduction allows taxpayers to reduce their taxable income up to $4,000 for qualifying education expenses for the 2020 tax year. However, Congress has yet to extend the tuition and fees deduction for the 2021 tax year. Orsolini calls this the “love-hate relationship” between the U.S. Congress, which writes the tax code, and tax credits, which are sometimes renewed last minute.

“It makes planning kind of difficult because you never know if the tax breaks are going to be there,” Orsolini says.

Bottom line

By Jan. 31, your school should send you a Form 1098-T that will show how much you paid the school during the tax year. The next step is to determine which tax breaks you qualify for, and who should claim them — the student or parent.

For many Americans, a college education is a big financial investment. But investing some time to identify education-related tax breaks could pay off with tax savings that take some of the sting out of higher-education costs.

Relevant sources: IRS: American Opportunity Tax Credit | IRS: Education Credits – AOTC and LLC | College Board: Trends in College Pricing 2018 Report | IRS Publication 970: Tax Benefits for Education | IRS: Credits and Deductions for Individuals |  IRS: Lifetime Learning Credit | IRS: Earned Income Tax Credit (EITC) | IRS: EITC Income Limits, Maximum Credit Amounts and Tax Law Updates | IRS: About From 8917, Tuition and Fees Deduction | U.S. Department of the Treasury: Writing and Enacting Tax Legislation

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.