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Tax Credits and Savings for Education

A tax credit reduces the amount of federal taxes the taxpayer owes and could result in a larger refund. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. In addition to those listed below, there are also additional tax code provisionsNew window icon including scholarship, fellowship, grant and tuition reductionsNew window icon, Qualified Tuition Program (QTP)New window icon, Education Savings Bond ProgramNew window icon, and business deduction for work-related educationNew window icon among others.

American Opportunity Tax CreditNew window icon

The American Opportunity Tax Credit allows claims of up to $2,500 for qualified educational expenses paid for each eligible student, for the first four years of postsecondary study. The full credit is available to individuals whos adjusted gross income is less than $80,000 or for married couples filing a joint return, less than $160,000.

A tax credit reduces the amount of income tax you may have to pay. Forty percent of the American Opportunity Credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you.

Lifetime Learning Tax CreditNew window icon

The Lifetime Learning tax credit is similar to the American Opportunity credit except that the student may be attending any grade level, including graduate school and does not need to be pursuing a program leading to a degree. This credit is for up to $2,000 each year of out-of-pocket expenses for tuition and school charges for courses to acquire or improve job skills.

Eligibility for the Lifetime Learning tax credit phases out starting with an adjusted gross income of $65,000 for a single tax filer or $130,000 if married filing jointly. You may not claim both the American Opportunity Scholarship and Lifetime Learning tax credits for the same year and same student in college.

Education Savings Accounts (Coverdell ESANew window icon)

For each child under age 18, families may deposit $2,000 per year into an Education Savings Account (ESA). Earnings would accumulate tax-free and no taxes will be due on distributions to pay qualifying expenses for tuition, fees, books, equipment, room and board. The ESA is phased out for married filing jointly with incomes above $220,000 and for single filers above $110,000. A taxpayer who uses tax-free distributions from an Education IRA may not, in the same year, benefit from the HOPE Scholarship or Lifetime Learning Credit.

Student Loan Interest DeductionNew window icon

Allows an above-the-line deduction (the taxpayer does not need to itemize in order to benefit) for interest paid in the first 60 months of repayment on private or government-backed loans, post-secondary education and training expenses. The maximum deduction is $2,500 in 2015. It is phased out for joint filers with incomes over $160,000 and to single filers with incomes over $80,000. The loan amount eligible for the deduction is limited to post-secondary expenses for tuition, fees, books, equipment, room, and board.

IRA WithdrawalsNew window icon

Taxpayers may withdraw funds from an IRA, without the usual 10% penalty for early distribution, for the higher education expenses of the taxpayer, spouse, child or grandchild. The amount that can be withdrawn without penalty is limited to qualified higher education expenses for tuition, fees, books, equipment, room and board.

Additional Information

The Internal Revenue Service maintains a comprehensive list of Tax Benefits for Education, Publication 970New window icon. Visit this site for further information.