Are Education Expenses Tax Deductible? - SmartAsset

The tax code has changed a lot recently, and there may be some confusion among filers about whether or not education expenses are tax-deductible. Though the standard tuition and fees deduction expired at the end of 2020, you may be eligible for the American opportunity credit, the lifetime learning credit or a student loan interest deduction. Here we’ll break down what each of these tax credits and deductions means for your taxes.

For help with taxes and other financial questions, consider working with a financial advisor.

The American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) gives eligible students an annual tax credit to apply toward education expenses. These expenses include course-related fees, books, supplies, etc. This credit gives you 100% of the first $2,000 spent on post-high school education and 25% on the next $2,000, making the total available credit $2,500.

The AOTC is partially refundable up to 40% of the $2,500. So that means if your tax bill is $0, you can still receive a refund of up to $1,000.

Undergraduate students and their parents are the target recipients of the AOTC. Those with a modified adjusted gross income (MAGI) of $80,000 ($160,000 if married and filing jointly) or less qualify. You can still qualify for a smaller amount if your income is more than $80,000 but less than $90,000 ($180,000 if filing jointly).

There are a few other things to note with the AOTC

It can only be claimed for four tax years
You’re ineligible if you’ve been convicted of a felony drug charge
You must be enrolled at least half-time in a degree program

The Lifetime Learning Tax Credit

Another tax credit available to eligible students is the Lifetime Learning Tax Credit (LLTC). This credit can give you up to 20% back on the first $10,000 spent on education expenses (such as books, tuition, etc.), equaling up to $2,000. The main difference from the AOTC is that the LLTC is also available to those taking vocational courses and continuing their education to grow career skills.

This tax credit is not refundable, unfortunately. That means the $2,000 will only be applied to the taxes you owe. So, say you owe $1,000, this credit will cover that $1,000, but you won’t receive a check for the remaining $1,000 of the credit in the form of a refund.

Like the AOTC, the Lifetime Learning Tax Credit requires filers to have a MAGI of less than $80,000 ($160,000 if filing jointly) for 2022 taxes. Benefits phase out from $80,000 – $90,000 ($180,000 if filing jointly).

You do not need to be enrolled in a degree program to be eligible for the LLTC. Any courses used to improve or acquire new job skills qualify.

Student Loan Interest Deduction

If you’re currently enrolled, you may not be paying off your student loans yet. However, as soon as you start paying, it’s good to know that the student loan interest is tax deductible. You can deduct up to $2,500 of the interest you paid annually. That includes both required payments and payments you made voluntarily to pre-pay.

Because student loans can be used to pay for things other than tuition, this deduction helps with anything you used your loan for. That can include housing

Like the two tax credits above, whether you’re eligible for this deduction depends on your MAGI. You can only take full advantage of this deduction if your MAGI is $70,000 ($140,000 if filing jointly) or less. From $70,000 – $85,000 ($170,000 if filing jointly), the deduction phases out. Anyone with over $85,000 taxable income won’t be eligible for this deduction.

Tax Credit vs. Tax Deduction

It is important to know the difference between a deduction and a tax credit. Tax credits directly lower the amount of taxes you owe. Some are refundable, meaning that if you owe less than what the credit is for, you’ll receive a payment from the IRS.

Tax deductions, on the other hand, lower your taxable income. Most of the time, tax credits are the better of the two. However, that can change as you move up in the tax bracket and a larger percentage of your income is taxable.

The Bottom Line

So, are education expenses tax deductible? Yes, they are. But even better, if you’re enrolled, you may be eligible for two tax credits: the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. Of the two, the American Opportunity Tax Credit is the only one that’s partially refundable. If you’ve started paying your student loans, you can also deduct up to $2,500 of the interest you paid.

The pursuit of knowledge is always valuable, whether it’s higher learning or finding ways to make the tax code work for you.

Tips for Lowering Your Tax Bill

A financial advisor can help you find ways to make the most of credits and deductions, and help you lower your tax bill. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can also use a tax preparation software to help you find deductions and credits. Some common examples of this type of software are TurboTax, H&R Block, and TaxSlayer.
Want to estimate how much Federal Income Tax you’ll be paying? A good place to start is our Federal Income Tax Calculator.