Education Tax Credits

By Celeste Stewart

Paying for college is a challenge for students of all ages. While many options, such as student loans and financial aid packages, exist to help pay for college, other options are available in the form of education tax credits, deductions and incentives. However, like most tax credits and deductions, the Internal Revenue Service has specific eligibility requirements and limits in place.

Education Tax Credits

The American Opportunity Credit and the Lifetime Learning Credit are the two education tax credits most recently offered to students(1).

  • The American Opportunity Credit – This tax credit, which is a modified version of the Hope tax credit, is part of the American Recovery and Reinvestment Act. As of 2010, the credit is available to individuals with a modified gross income of $90,000 or less (or $180,000 or less for married couples filing jointly). The maximum credit is $2,500 per eligible student pursuing an undergraduate degree or other recognized education credential. You cannot take the American Opportunity Credit for the same student for more than four years, nor can you take both an education tax credit and the tuition and fees education tax deduction for the same student for the same year. This tax credit is partially refundable; if you owe no income taxes but are eligible for this credit, you can receive 40 percent of the credit as a tax refund.(1)
  • The Lifetime Learning Credit – This education tax credit has lower income levels than the American Opportunity Credit ($60,000 for individuals, $120,000 for married couples filing jointly) and is nonrefundable. However, it can be used for an unlimited number of years, and students do not necessarily need to be pursuing a degree or recognized education credential. Like the American Opportunity Credit, you cannot take this tax credit and the tuition and fees education tax deduction for the same student for the same year(1).

Education Tax Deductions

In addition to education tax credits, the IRS allows eligible taxpayers to deduct certain education expenses from their taxes. Keep in mind that if you are claiming one of the tax credits, you may not be able to claim these tax deductions.

  • Student Loan Interest Deduction – If you are financing your education with student loans and meet specific eligibility requirements, you may be able to deduct up to $2,500 of student loan interest. Modified adjusted gross income (MAGI) limits as of the 2010 tax year are $75,000 for individuals and $150,000 for married couples filing jointly.
  • Tuition and Fees Education Tax Deduction – This education tax deduction allows you to deduct up to $4,000 worth of tuition and fees from your income if you meet the eligibility requirements. MAGI limits as of the 2010 tax year are $80,000 for individuals and $160,000 for married couples filing joint returns.

Education Tax Incentives

Another way to save on federal income taxes is through education tax incentives such as Coverdell Education Savings Accounts or 529 plans. These programs allow you to save money for qualified college expenses in special accounts where earnings grow tax free. As with any other tax program, these education tax incentives are subject to specific requirements.

  • Coverdell Education Savings Accounts (ESAs) – These accounts can be opened for beneficiaries who are under age 18 or have special needs. To contribute to a Coverdell ESA, your modified adjusted gross income must be less than $110,000 for an individual or less than $220,000 for married couples filing jointly. A single beneficiary can receive no more than $2,000 per year in Coverdell ESA contributions. Distributions are free of federal income tax provided that they are no more than the beneficiary’s adjusted qualified education expenses for the year.
  • 529 Plans – Also called “Qualified Tuition Programs,” 529 plans are accounts set up by states that allow you to contribute money for a designated beneficiary’s qualified education expenses. Like Coverdell ESAs, earnings and distributions are not subject to federal income taxes as long as they are no more than the beneficiary’s adjusted qualified education expenses for the year. There are no income limits. Contributions cannot exceed the amount necessary to provide for the beneficiary’s qualified education expenses. In addition, if you contribute over $13,000 to a beneficiary in a single year, this contribution may be subject to gift taxes.(2)

You can contribute to both a Coverdell ESA and a 529 plan for the same beneficiary in the same year. In addition, you can claim education tax credits in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA or 529 plan as long as the same expenses are not used for both benefits.(1)

Whether you’re currently saving for college, financing college with student loans or paying for it out of pocket, education tax credits, deductions and tax incentives may be available if you qualify.


Works Cited

  1. Tax Benefits for Education. IRS.gov. [Online] [Cited: October 12, 2011.]
  2. 529 Plans: Questions and Answers. IRS.gov. [Online] [Cited: October 12, 2011.]


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