Education tax credits are your reward from Uncle Sam for investing in your future each year you’re in school.
You or your parent can claim the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deduction for education expenses you paid last year.
The American Opportunity Credit is specifically for college students, while the Lifetime Learning Credit and tuition and fees deduction can be claimed by graduate and vocational students, too. You can claim any of these tax breaks even if you paid with a student loan.
While there are a few major differences among the education tax breaks, online tax preparation software will help you claim the most valuable one if you’re eligible for all three.
American Opportunity Tax Credit
How it works: You can lower your tax bill by up to $2,500 if you paid that much in undergraduate education expenses last year. The American Opportunity Tax Credit lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500.
Who can claim it: Students or their parents can claim the credit on their taxes for a maximum of four years. Your parents will claim the credit if they paid for your education expenses and you’re listed as a dependent on their return.
You’ll get the full credit if your modified adjusted gross income, or MAGI, was $80,000 or less in 2016 ($160,000 or less if you file your taxes jointly with a spouse). If your MAGI was between $80,000 and $90,000 ($160,000 and $180,000 for joint filers), you’ll end up with a reduced credit. If you earn more than that, you can’t claim this credit.
What it’s worth: The American Opportunity Tax Credit cuts the amount of taxes you pay. If you owe $3,000 in taxes and get the full $2,500 credit, for example, you’ll have to pay only $500 to the IRS.
This credit is generally more valuable for college students than the Lifetime Learning Credit because it’s refundable. And you can still receive 40% of its value — up to $1,000 — even if you earned no income last year. That means you can get a refund even if you owe no tax.
Lifetime Learning Credit
How it works: You can claim 20% of the first $10,000 you paid toward tuition and fees in 2016, for a maximum of $2,000. Like the American Opportunity Tax Credit, the Lifetime Learning Credit doesn’t count living expenses or transportation as eligible expenses. But you can claim books or supplies needed for coursework.
Who can claim it: The Lifetime Learning Credit isn’t just for undergrads or their parents. The credit applies to undergraduate, graduate and non-degree or vocational students, and there’s no limit on the number of years you can claim it. So it’s ideal for graduate students or anyone taking classes to develop new skills, even if you already claimed the American Opportunity Tax Credit on your taxes in the past.
What it’s worth: You can claim the credit if your MAGI was less than $65,000 ($131,000 if you filed jointly) last year. If your MAGI was between $55,000 and $65,000 ($111,000 to $131,000 if you filed jointly), you can get a reduced credit. You can’t get the credit if your MAGI was more than $65,000 ($131,000 if you’re married and filing jointly).
The Lifetime Learning Credit isn’t refundable, so you won’t receive the credit as a refund if you earned no income.
Another option: Tuition and fees deduction
You may choose to skip the education credits and claim the tuition and fees deduction instead, which can reduce your taxable income by up to $4,000. It’s available to students and parents who earned less than $65,000 (or $130,000 if married filing jointly). If you earned between $65,000 and $80,000, the maximum deduction is $2,000.
The tuition and fees deduction likely won’t translate to as much savings as a credit, but might be worth it for some filers.
Read more about the difference between tax credits and tax deductions.
In January your school will send you Form 1098-T, a tuition statement that shows the education expenses you paid for the year. You’ll use that form to enter the corresponding amounts on your tax return.
NerdWallet’s guide to preparing and filing taxes online can help you choose tax prep software that will automatically compare your savings from potential education credits and deductions. The best part? Tax software is free for a lot of filers. Doing your taxes might not be so bad after all.
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