Are You Eligible for Higher Education Tax Benefits?

Tax credits and tax deductions help offset some of the costs of college

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If you or your child is in college, you may be eligible to claim tax credits and deductions for higher education. During tax season, you may want to file your tax return as soon as possible to also potentially increase any college financial aid available.

With both college and taxes in mind, here's what you need to know to claim the right higher education tax benefits.

Key Takeaways

  • If you or your child is in college, you may qualify for higher education tax benefits that can help reduce your taxable income and tax bill.
  • You can also go back and update your FAFSA info each year via the IRS Data Retrieval Tool, which could help you or your child qualify for more financial aid.
  • Some of the tax credits and deductions available to claim include the American opportunity tax credit, the lifetime learning tax credit, and the student loan interest tax deduction.

Education Benefits and Your Tax Return

You can claim education tax benefits if you file your taxes as single or married filing jointly. Unfortunately, the Internal Revenue Service (IRS) does not allow you to claim education tax credits if you are married and file separately.

You may be eligible for education tax benefits if you already have a child in college or are in college yourself. This can offset some of the out-of-pocket costs you're incurring. You may be eligible for tax deductions, which can reduce the amount that is considered taxable income. You might also be able to claim some tax credits, which can reduce the amount of tax you owe.

Note

You can go back to the Federal Student Aid website and use the IRS Data Retrieval Tool to update your FAFSA application with your current figures after you've completed your annual federal tax return. This may help you qualify for more college aid.

American Opportunity Tax Credit (AOTC)

The American opportunity tax credit reduces the amount of tax you owe the federal government. You may be eligible to receive a credit of up to $2,500 per student to help offset what you're paying for the first four years of higher education. The amount varies depending on your income, the amount of higher education expenses, and the number of eligible students in a family.

Up to 40% of the credit may be refundable (up to $1,000), so you may be eligible to receive a refund check from the IRS, even if you don't owe any federal income taxes.

If your modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for joint filers), you can generally claim the credit for the qualified expenses of an eligible student. The credit is reduced if your MAGI exceeds that amount. If your MAGI is greater than $90,000 ($180,000 for joint filers), you can't claim the credit.

Lifetime Learning Tax Credit

The lifetime learning credit is slightly different from the American opportunity tax credit. It's designed to encourage a wider range of education options. It can help pay for undergraduate, graduate, and professional degree courses, which may include courses taken to acquire or improve job skills.

This credit provides up to $2,000 per tax return. There's no lifetime limit, but it's non-refundable, which means that the maximum amount of credit available is limited to the amount of tax owed.

Student Loan Interest Tax Deduction

You may be able to receive a tax deduction of up to $2,500 for student loan interest you've paid for yourself, a spouse, or a child based on your income and the amount of interest paid. For 2022, the full amount of this deduction is available to taxpayers with a MAGI less than $75,000, or $150,000 for married taxpayers filing jointly. Those with MAGI lower than $90,000, or $180,000 for married taxpayers filing jointly may be eligible for a reduced deduction.

Note

On Tuesday, Nov. 22, 2022, the Biden administration extended the pause on payments and interest on federal student loans for the eighth time. Borrowers with federal student loans won’t have to make payments, and loans won’t resume accumulating interest, until 60 days after court cases challenging Biden’s student loan forgiveness program are resolved or the Department of Education is allowed to move forward with the program. If the cases aren’t resolved by June 30, 2023, payments will resume two months after that.

The Bottom Line

Don’t get overwhelmed when filing your federal income taxes. If you can afford to, speak with a tax advisor to make sure you’re taking the proper tax deductions and credits to ensure you're getting the most out of the higher education tax benefits that are available.

You can seek help in preparing your tax returns from The Volunteer Income Tax Assistance (VITA) program if you feel challenged and you make less than $58,000 per year. The IRS offers a tool to help you find the VITA location closest to you. If that doesn't work for you, you may be eligible to file your federal income taxes electronically for free with IRS Free File.

Frequently Asked Questions (FAQs)

What are tax-free employer-provided education benefits?

Some employers offer employees education assistance benefits such as reimbursement for higher education classes. The IRS considers employer-provided educational assistance to be tax-free, meaning you need to subtract that amount from your qualified education expenses.

How do you file for education tax benefits?

To claim the American opportunity tax credit or the lifetime learning credit, you'll need Form 1098-T, which you should receive from your eligible education institution by Jan. 31. Once you have that form, you'll need to file Form 8863 and attach it to your Form 1040. For the student loan interest deduction, you do not need to file Schedule A and itemize your deductions; it can be taken as an adjustment to your income.

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