Tax guide

Tuition Deduction vs. Education Credits

Updated for filing 2021 tax returns

When it comes to getting some of your college expenses back in your pocket, there are a few 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?

What kinds of tax breaks are out there for students and new grads?

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, was subtracted from your taxable income—but unfortunately, it is no longer an option, since the Tax Cuts and Jobs Act of 2017 removed the deduction.

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 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 limit for single filers to qualify for the full credit ($160,000 if you’re married filing jointly), and the credit phases out completely at $90,000 for single filers ($180,000 for married filing jointly). 

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.

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. 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.

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Also see: Tax Breaks for Students and New Grads

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