Tax Guide

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Tax Breaks for Students and New Grads

If you’re a college student (or the parent of one), you should know about some key tax breaks that are available to you when you do your taxes.

Tax Credits

There are two tax credits for higher education. They’re targeted at different types of students, so it pays to know the differences.

American Opportunity Credit

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 AOC is worth $2,500; the really good news is that $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.

The American Opportunity Credit is available through the 2017 tax year.

Lifetime Learning Credit

Where the American Opportunity Credit is limited to the first four years of college, the Lifetime Learning Credit (LLC) has a wider availability. This credit can be used for graduate school, undergraduate expenses, even professional or vocational courses. Plus, there’s no limit to how many years you can claim it.

The Lifetime Learning Credit, however, is nonrefundable, which means it’s limited to your tax liability. For example, if you qualified for the full $2,000 Lifetime Learning Credit, but had a tax liability of $500 for the year, you’d only get a credit for $500.

Deductions

The two deductions below are not available if you are married and filing separately, or if someone else – such as a parent – claims you as a dependent on his or her return. Parents can still claim the deductions, provided they paid the expenses.

Tuition and Fees Deduction

If you don’t qualify for one of the education credits, you may still be able to deduct your tuition and fees. The deduction can cut your taxable income by up to $4,000. It’s taken as an adjustment to income, which means you can claim this deduction even if you don’t itemize deductions.

The income limit for this deduction is $80,000 for single taxpayers and $160,000 for married filing jointly.

Student Loan Interest Deduction

The Student Loan Interest Deduction helps to cover the interest you have on your student loans. This deduction can reduce your taxable income by up to $2,500. Like the tuition and fees deduction, the Student Loan Interest Deduction is taken as an adjustment to income, so you can claim it even if you don’t itemize deductions.

One Per Customer, Please

One thing to remember, though: For each student, you can claim either the American Opportunity Credit, or the Lifetime Learning Credit, or the tuition and fees deduction. The IRS won’t let you take more than one of these particular tax breaks for the same person on the same return.

But: Parents claiming two or more college kids as dependents on their return can claim one of these tax breaks for one student and another for a different student. 

And: You can still take the student loan interest deduction even if you’re claiming one of the other tax breaks.

How to Claim Education Tax Breaks

When you’re doing your taxes with 1040.com, you can apply for either education credit or the tuition and fees deduction on our Form 1098-T and Education Expenses screen. As for student loan interest, report it on line 33 of our Form 1040 – Adjustments Section screen. Our tax return interview will help you fill out the right screens.

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