Tax Incentives & Deductions

Federal tax credits and deductions are the newest forms of federal aid. A tax credit is money which can be subtracted from the amount of taxes you owe. In order to receive a tax credit, you must complete a federal tax return, meet certain federal guidelines, and pay taxes. Tax credits are subtracted directly from the tax a family owes. Tax deductions differ from tax credits in that deductions are subtracted from your taxable income.

For tax year 2013, there are three tax credits available to help offset the costs of higher education by reducing the amount of your income tax. These tax credits are the American Opportunity Credit, and the Lifetime Learning Credit.

*A taxpayer can only claim one of these credits for the same student in the same year.

American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010, and was to expire at the end of 2012, but has been extended through December 2017 by the American Taxpayer Relief Act of 2012, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student, $1,000 of which can be refunded if your credit is more than you owe in taxes.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

Special rules applied to students attending college in a Midwestern disaster area for tax-year 2009, only, when taxpayers could choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

Lifetime Learning Tax Credit

The lifetime learning credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
  • Must have a modified adjusted gross income of $62,000 or less (for married couples filing a joint return, $124,000 or less).

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.

Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

Taxpayers with a modified adjusted gross income (MAGI) of less than $80,000 ($160,000 if married and filing jointly) may be eligible for a $2,000 deduction. If your MAGI is less than $65,000 ($130,000 if married and filing jointly) you could be eligible for the maximum $4,000 deduction. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

  • Your filing status is married filing separately.
  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
  • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.


For more information please visit the Internal Revenue Service or National Association of Student Financial Aid Administrators (NASFAA)