What are the tax credits and deductions relating to higher education?

There are two education tax credits — the American Opportunity credit and the Lifetime Learning credit — that provide some relief to families in the midst of financing their children’s college education. There is also a federal income tax deduction for individuals who are repaying student loans. As a general rule, a tax credit is a dollar-for-dollar reduction against taxes owed, and it is therefore more valuable than a tax deduction of the same dollar amount.

American Opportunity credit

The American Opportunity credit is worth a maximum $2,500 per student in tax savings for the first four years of your child’s post-secondary education. The credit is calculated as 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of expenses.

There are eligibility restrictions. First, the credit applies only to undergraduate students who are enrolled in college on at least a half-time basis. Second, the ability of parents to take the credit depends on their modified adjusted gross income (MAGI). In 2023, the full credit is available to single filers with a MAGI below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. The same limits applied in 2022.

One distinct advantage of the American Opportunity credit is that there is no limit on the number of credits that may be claimed on a single tax return in a given year (provided each person qualifies independently). For example, if Mom and Dad have triplets who are in their freshman year of college, then Mom and Dad can claim a total of $7,500 ($2,500 x 3) in credits for that year. However, the American Opportunity credit and Lifetime Learning credit are mutually exclusive; they cannot be taken in the same year on behalf of the same student.

Lifetime Learning credit

The second education tax credit is the Lifetime Learning credit, which is worth a maximum of $2,000. The credit is calculated as 20 percent of the first $10,000 of qualified tuition and related expenses.

As the name implies, the Lifetime Learning credit is intended to apply to higher education courses taken throughout your lifetime, whether to acquire or improve job skills. As such, it is less restrictive on the type and level of enrollment than the American Opportunity credit. For example, the Lifetime Learning credit is available to graduate students as well as to undergraduate students. It is also available to students enrolled on less than a half-time basis. So, a single word processing course taken at a local community college will qualify for the credit.

The income limits to qualify are the same as the American Opportunity credit. In 2023, the full Lifetime Learning credit is available  to single filers with a MAGI below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. The same limits applied in 2022.

One particular disadvantage of the Lifetime Learning credit is that it is limited to a total of $2,000 per tax return per year, regardless of the number of people who qualify in a family in a given year. So, in the example with the triplets, Mom and Dad would be able to take a total credit of $2,000, not $6,000.

Student loan interest deduction

You can deduct up to $2,500 of the interest you pay on qualified student loans, provided you meet the income limits. In 2023, for single filers, a full student loan interest deduction is available with a modified adjusted gross income (MAGI) up to $75,000 and a partial deduction is available for a MAGI between $75,000 and $90,000. For joint filers, a full deduction is available with a MAGI up to $155,000 and a partial deduction is available with a MAGI between $155,000 and $185,000.

Deduction for qualified tuition and fees

The deduction for qualified tuition and fees has been repealed for 2021 and beyond. In 2020, the deduction was worth up to $4,000 for out-of-pocket qualified tuition and fee expenses paid during the year. Single filers with a modified gross income (MAGI) of $65,000 or less and joint filers with a MAGI of $130,000 or less could take the full $4,000 deduction. A $2,000 partial deduction was available for single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and $160,000.