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Summers go by in a flash. Before you know it, you’re spending money on back-to-school necessities. Read more to find out what education expenses are tax deductible, what tax incentives are available to save for future education, what education tax credits may be available to you, and more.
What type of education expenses are tax deductible?
Whether you’re looking to deduct education expenses for your middle-schooler, save for future education, or send yourself back to school, there are a variety of education tax breaks you can take. We will give a broad overview below, but always work with your Tax Professional during tax season and throughout the year if you have questions about your specific situation.
What are qualified education expenses?
Qualified education expenses are amounts paid for tuition, fees, and other related expenses for an eligible student.
Qualified education expenses must be paid by:
- You or your spouse if you file a joint return,
- A student you claim as a dependent on your return, or
- Other relatives or friends.
You can claim an education credit for qualified education expenses paid by cash, check, credit or debit card, or with money from a loan.
If you pay the expenses with money from an education loan, you take the credit for the year you pay the expenses, not the year you get the loan or the year you repay the loan.
Lifetime Learning Credit
If you paid expenses related to college, graduate, or vocational school, you may claim the Lifetime Learning Credit, one of the most popular education tax breaks. This is a non-refundable credit of up to $2,000 (per return) of qualified tuition, fees, and expenses you paid for yourself, spouse, or a dependent. A non-refundable tax credit means your credit is only used to cover your taxes, and the remaining amount does not get added to your refund. You do not have to be in a degree program, a full-time student, or in the first four years of post-secondary education.
American Opportunity Credit
The American Opportunity Credit – known also as the American Opportunity Tax Credit – applies to qualified education expenses for the first four years of higher education for eligible students. The credit equals 100% of the first $2,000 paid in qualified expenses, and 25% of the next $2,000. The total maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable.
Who is eligible for the American Opportunity Credit?
To qualify, students must fit the following criteria.
- Pursuing a degree or certificate from an eligible institution—an eligible institution is one that qualifies for federal grants and student loans
- Enrolled at least part-time for at least one academic period beginning in the tax year— an academic period is determined by the learning institution
- In the first four years of degree or other credential program at the beginning of the year
- In the first four years of a degree or certificate program
- Free of any felony drug convictions
The expenses that qualify for the American Opportunity Credit include those “necessary and required” to complete courses at a post-secondary school. This includes the following:
- Tuition and required fees paid
- Cost of required books and materials
- Certain equipment required for the course of study (such as dental equipment for a dental student).
To claim the full credit, your modified Adjusted Gross Income (AGI) must be $80,000 or less, and $160,000 or less if you and your spouse are filing a joint return. You can claim a smaller percentage of the credit if your individual income is between $80,000 and $90,000, or $160,000 and $180,000 for joint filers.
It’s important to note that the American Opportunity Credit only applies to the first four years of an accredited educational program.
Credits for school supplies, equipment and course materials
For the American Opportunity Credit only, expenses for books, supplies, and equipment the student needs for a course of study are included in qualified education expenses, even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense, but a book purchased at an on-campus store that isn’t related to coursework is not. Remember to keep your receipts for when it’s time to file your taxes.
Student loan interest deduction
If you paid $600 or more in student loan interest during the year, the lender is required to furnish you with Form 1098-E. The interest you paid the lender or servicer is reported in Box 1.
Form 1098-E is an informational form used to report student loan interest that you paid during the year. It is issued by the government departments, financial institutions, specialized student loan service providers, educational institutions, and other entities that offer loans designated for educational purposes.
If you paid less than $600 in interest, the lender or servicer is not required to issue a 1098-E to you. In the event you did not receive a Form 1098-E regardless of how much you paid, you should retain your record of interest payments.
You may be eligible for the student loan interest deduction depending on your income and filing status. For example, if you have student loans with multiple lenders or servicers, you also may have paid less than $600 to each of them and will need to manually calculate the total of your student loan interest deduction. Always work with your local Tax Pro as they can help with any questions or concerns you may have.
Education savings accounts
You can set up a Coverdell Education Savings Account for a child under the age of 18 if your modified AGI is less than $110,000 as an individual, or less than $220,000 for married couples filing a joint return.
Anyone, including the child, can contribute to the account during the year. The maximum contribution is $2,000 per beneficiary. Withdrawals will be tax-free when used to pay the beneficiary’s qualified education costs for elementary, secondary, college, or graduate school.
In addition, a Section 529 Plan, also known as a Qualified Tuition Program or QTP, allows you to prepay a student's college tuition or contribute to an education savings account. Contributions are not tax-deductible on federal returns, but interest earned on the account and distributions will be tax-free if you used the funds to pay for qualified education expenses for the student its intended for.
Many states offer an additional tax break such as allowing parents to deduct up to $10,000 in 529 plan contributions per child, per year. Check your state’s laws for allowed deduction amounts.
You can also use distributions from the 529 plan to pay up to $10,000 per year of tuition for elementary or secondary public, private or religious schools. There is no limit on the amount you can use from the 529 plan for post-high school education. Homeschooling expenses are not eligible.
Education tax forms
As mentioned above, if you paid more than $600 in student loan interest, you’ll receive a Form 1098-E, or Student Loan Interest Statement.
You may also receive Form 1098-T, or Tuition Statement. This form reports tuition expenses you paid for college tuition that might entitle you to an adjustment to income or a tax credit.
What qualifies a child as a dependent?
Finally, you may be wondering what the rules for a qualifying child dependent may be. You’d want to establish if your child is considered your dependent by these series of tests.
- The relationship test: The child must be your son, daughter, stepchild, adopted child, or eligible foster child—or descendant (for example, a grandchild or great-grandchild). The child may also be a sibling, half-sibling, stepsibling, or their descendant (for example, nephew or niece).
- Age test: The child must be under age 19, a full-time student under age 24, or any age if permanently and totally disabled. Note: The taxpayer must be older than the child, unless the child is disabled.
- Residency test: The child must have the same main home as you for more than half the year. The child must also be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.
- Support test: The child cannot provide more than half of their own support.
- Joint return test: The child cannot file a joint return with someone.
For divorced or separated taxpayers, the IRS recognizes the physical custodial parent as the parent the child lives with more than half the year. For IRS purposes, you must count the nights because the child must live with the parent 183 nights, 184 nights if a leap year. As mentioned above, it’s important to file early to make sure that you’re able to claim your dependents before someone else does. Work with your Tax Professional if you have questions regarding your specific situation.
Whether you’re sending your children to elementary school, or you’ve decided to go back to college for an advanced degree, education at any level brings with it some enticing tax incentives, as well as plans for making the most of your finances when it comes to further education. Find a Tax Pro near you to help maximize your tax credits and deductions.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.