Balancing Higher Education Costs with Federal Tax Credits

Getting an education is expensive, but if you take advantage of the federal tax credits that are available today, you can catch a bit of a break. For postsecondary education expenses, you have the option of choosing between two federal tax credits, the American Opportunity Credit or the Lifetime Learning Credit. The credits can be claimed for yourself, your spouse or your dependent. You may be eligible to claim one of these federal tax credits if you fit one of the following descriptions:

American Opportunity Credit

  • The credit can be up to $2,500 per eligible student.
  • It is available for the first four years of postsecondary education.
  • Forty percent of the credit, or up to $1,000 is refundable if you have zero tax liability.
  • The student must be enrolled at least part time and pursuing an undergraduate degree.
  • Qualified expenses include tuition and fees, including course related books, supplies, and equipment.
  • The full credit is generally available to eligible taxpayers with AGI’s of less than $80,000 ($160,000 for married couples filing a joint return).

Lifetime Learning Credit

  • The credit can be up to $2,000 per eligible student (only one per household).
  • It is available for all years of postsecondary education.
  • The credit is limited to your tax liability.
  • The student does not need to be pursuing a degree.
  • Qualified expenses include tuition and fees, including course related books, supplies, and equipment required to be paid to the institution.
  • The full credit is generally available to eligible taxpayers with AGI’s less than $50,000 ($102,000 for married couples filing a joint return).

In addition to these federal tax credits, student loan interest of up to $2,500 can be claimed as a tax deduction for eligible taxpayers who make less than $75,000 ($150,000 for married couples filing a joint return). This is an adjustment to income, so you can claim this deduction even if you don’t itemize deductions.

Please contact us if you have any questions in choosing which of these federal tax credits can provide you with the greatest savings.