When it comes to getting some of your college expenses back in your pocket, there are basically two options at income tax time: claim one of the two education credits, or the tuition and fees deduction. The question is, which is best for you?
To find the best option for you, you need to know how each option works.
Let’s look at the two credits first. No matter which of the two education credits you qualify for – the American Opportunity Tax Credit or the Lifetime Learning Tax Credit – they both operate from the same principle. Tax credits reduce your tax bill by the actual amount of the credit. In other words, once our software figures your total income tax for the year, one of these credits is taken right off the top, cutting your tax bill dollar-for-dollar.
The tuition and fees deduction, on the other hand, is subtracted from your taxable income. Your tax will be lower, but not dollar-for-dollar like a credit. Bottom line, it's generally better to use a tax credit than a deduction, but do your math to get your personal bottom line. Your mileage may vary.
When it comes to sizing up the three education tax breaks, reading the fine print pays off. Just going for the option with the biggest number mentioned may not give the best results for you.
The tuition and fees deduction sounds good on the surface; it offers a deduction of up to $4,000. This option is open even if you don’t itemize deductions. But since the deduction is for the taxpayer, not the student, it may not be the most beneficial for those with more than one student in the family.
There are two education tax credits: the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. If you qualify, the credit amount is taken right off the top of your tax total for the year, cutting your tax dollar-for-dollar. Here's how the two credits work.
The American Opportunity Credit (AOC) is for students earning an undergraduate degree. The credit is specifically limited to those expenses incurred in the first four years of college.
The credit is worth up to $2,500, and up to $1,000 of that is refundable, meaning you could get that back as a refund even if you don’t owe any taxes. There’s an $80,000 income ceiling for single filers to qualify for the credit ($160,000 if you’re married filing jointly). If your income is more than those amounts, the credit starts to decrease.
Note that the credit is available for each qualifying student on the return. So, a family with two college students could get $5,000 trimmed off its final tax bill.
Where the American Opportunity Credit is limited to the first four years of college, the Lifetime Learning Credit (LLC) has a wider availability. The credit can be used for undergraduate expenses, graduate school, even professional or vocational courses. There’s no limit to how many years you can claim it.
The Lifetime Learning Credit is also figured a little differently. The credit amount is equal to 20 percent of the first $10,000 of qualified education expense, so the maximum is $2,000 per year. But the catch is, that's per tax return, not per student.
The Lifetime Learning Credit is also nonrefundable, which means it’s limited to your tax liability. For example, if you qualified for the full $2,000 credit amount, but your tax liability was only $500 for the year, you’d only get a credit for $500.
Still, the Lifetime Learning Credit and the tuition and fees deduction do have their place. The Lifetime Learning credit works for those in post-graduate classes, or for taxpayers who take courses to stay current or to advance in their jobs. And the tuition and fees deduction might be more useful if your income is higher than the income limits of the two education credits.
When you’re doing your taxes with Tax Office & Associates™, you can apply for education tax breaks on our Education screen. Our tax return interview will help you fill out the right screens.