Given that the tax law is (usually) set up to reward things that Congress has decided are beneficial to our country, it’s no surprise that there are tax breaks available to people paying for higher education expenses.
Tuition and Fees Deduction
If you pay higher education expenses for yourself, your spouse, or your dependent, you may be entitled to the tuition and fees deduction of up to $4,000. In order to qualify for the deduction (an above-the-line deduction), you must:
- Have a modified adjusted gross income of less than $80,000 ($160,000 if married filing jointly),
- Not be able to be claimed as a dependent on somebody else’s return, and
- Not be married filing separately.
Qualifying Education Expenses
In order to be deductible, the expenses must be paid to a university, college, vocational school, or other postsecondary educational institution. Deductible expenses include tuition, fees, and other course-related expenses that are required to be paid to the institution as a condition for enrollment or attendance.
EXAMPLE: Jack is attending school to be a filmmaker. In addition to his tuition, he’s required to pay $500 per semester for use of the school’s film studio. Because he is required to pay the $500 to the school in order to attend classes, the expense can be included as a qualifying education expense.
EXAMPLE: Lee is attending school for a degree in Spanish. Each semester, he is required to buy several textbooks and DVDs to use for his courses. However, because his school doesn’t require that he buy the materials from the school—he could buy them online on Amazon, for instance—the cost does not count as a qualifying education expense.
Two more points of note about the tuition and fees deduction:
- Room and board does not count as a qualifying education expense.
- It doesn’t matter whether or not the money used to pay the expenses was obtained with a loan.
Education Credits
As an alternative to taking the tuition and fees deduction for higher education expenses, you may be able to use one of two credits: the Lifetime Learning Credit or the American Opportunity Credit.
Each year, for a given student, you can only use one of the three (the deduction, or one of the two credits). As such, this area is one in which it’s particularly valuable to know your options so that you can make the best decision.
As with the tuition and fees deduction, you can only claim a credit for higher education expenses paid for yourself, your spouse, or a dependent.
American Opportunity Credit
The American Opportunity Credit (a temporary modification of what used to be called the Hope Credit) is available for students who are in their first four years of postsecondary education and who are enrolled at least “half-time.” The amount of the credit is the sum of the first $2,000 of qualified education expenses paid for the student, plus 25% of the next $2,000 of qualified expenses. (Note that this means that the maximum credit per student is $2,500 for 2011.)
Your eligibility to claim the American Opportunity Credit begins to decrease as your modified adjusted gross income exceeds $80,000 for 2011 ($160,000 if married filing jointly). Once your MAGI reaches $90,000 ($180,000 if married filing jointly), you’ll no longer be eligible to use the credit.
In addition to the expenses that can be used when calculating the tuition and fees deduction, expenditures for “course materials” can be used for purposes of calculating the American Opportunity Credit. “Course materials” includes books and supplies needed for a course, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
Lifetime Learning Credit
The Lifetime Learning Credit is available for any student enrolled in postsecondary education or any employee enrolled in courses to acquire or improve job skills. The amount of the credit is 20% of the first $10,000 of qualified education expenses. (Note that this means that the maximum credit is $2,000 for 2011.)
As with the tuition and fees deduction, the only expenses that can be considered when calculating the Lifetime Learning Credit are:
- Tuition and fees, and
- Other course-related expenses that are required to be paid to the institution as a condition for enrollment or attendance.
Your eligibility to claim the Lifetime Learning Credit begins to decrease as your modified adjusted gross income exceeds $50,000 for 2011 ($100,000 if married filing jointly). Once your MAGI reaches $60,000 ($120,000 if married filing jointly), you’ll no longer be eligible to use the credit.
Unlike the American Opportunity Credit, there is no limit to the number of years that the Lifetime Learning Credit can be used for a given student. However, the Lifetime Learning Credit can only be claimed for one student per tax return per year.
EXAMPLE: Katie and Alex are siblings. Alex is a freshman in college, and Katie is a senior (in her fifth year of college). With the help of some student loans, their family spends $10,000 for tuition for each of them for the year.
The family should probably claim the American Opportunity Credit for Alex, because it will allow for a credit of $2,500, as opposed to the $2,000 that would be allowed via the Lifetime Learning Credit. Also, by not using the Lifetime Learning Credit for Alex, the family can still use the Lifetime Learning Credit for Katie. (Katie is ineligible for the American Opportunity Credit, because she is in her fifth year of college.) In total, the family will be able to claim $4,500 of education-related credits.
Student Loan Interest Deduction
If you pay student loan interest during 2011 and your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be qualified for an above the line deduction for the amount of interest paid (up to $2,500). In order to qualify:
- The loan must be taken out solely to pay for qualified higher education expenses,
- You (and your spouse, if you have one) must not be claimed as a dependent on anybody else’s return, and
- If married, you must file jointly.
Simple Summary
- If you pay higher education expenses for yourself, your spouse, or a dependent, you can likely deduct up to $4,000 of those expenses per year.
- Students in their first four years of postsecondary education may be eligible to claim the American Opportunity Credit (of up to $2,500 for 2011).
- Students enrolled in postsecondary education may be eligible for the Lifetime Learning Credit (which can be as large as $2,000 in 2011). Only one Lifetime Learning Credit can be claimed per tax return per year.
- For a given student’s expenses, you can only use one of: the American Opportunity Credit, the Lifetime Learning Credit, or the tuition and fees deduction.
- If you pay student loan interest, you may qualify for an above the line deduction for the amount of interest paid, up to $2,500.
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