The federal government offers two sizable tax credits for higher education costs:
1. American Opportunity credit. This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of post-secondary education and is available only to students who attend at least half time.
Basically, tuition, course materials and fees qualify for this credit. Courses involving sports, games or hobbies generally don’t count. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:
- Between $80,000 and $90,000 for unmarried individuals, and
- Between $160,000 and $180,000 for married joint filers.
2. Lifetime Learning credit. The Lifetime Learning credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.
The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than one-half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. This credit applies to tuition, fees and materials.
It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:
- Between $58,000 and $68,000 for unmarried individuals, and
- Between $116,000 and $136,000 for married joint filers.
Important note: Starting in 2018, full-time students under age 24 (but too old to qualify for the child credit) may qualify for a $500 federal tax credit for other dependents under the Tax Cuts and Jobs Act. Contact us to learn the eligibility requirements.
Multiple factors should be reviewed before determining which higher education tax breaks to claim. Contact us for more information.
For other tips on how much you can realistically expect to spend, along with tips for lowering the overall cost visit our Sticker Shock: How Much Does a College Degree Cost? article.