Tax Benefits of Higher EducationAmina Vila
Senior Manager Chris Harper speaks with Steve Kelly of WOOD radio on the tax benefits of higher education.
Who Receives the Benefit?
College student claimed as a dependent on a parent’s tax return → parent claims the benefit → student is not a dependent of someone else → student claims the benefit.
Income limitations eventually reduce or eliminate various education credits and deductions.
- Parents often receive a greater tax benefit than students.
- Higher marginal tax bracket and greater overall total tax burden
- However, if elevated parental income reduces or eliminates benefits, determine if the student may claim himself or herself to maximize the family’s collective tax benefit.
American Opportunity Credit (AOTC)
- This is typically the most lucrative option if income is below phase-out thresholds.
- Qualified education expenses for attending a post-secondary institution
- Tuition and course materials (books, etc.), but NOT room & board or transportation
- Can be claimed on a per-qualifying-student basis.
- If you have multiple dependent children at college, you could claim multiple credits.
- Maximum credit is $2,500 per student
- 100% of the first $2,000 of education expenses, plus 25% of the next $2,000 of expenses
- Student must be enrolled at least half-time for a minimum of one academic period during the year.
- Applies to the student’s first four tax years at an institution leading to a degree or other credential.
Lifetime Learning Credit
- Unlike the American Opportunity Credit, this credit applies to an unlimited number of years.
- The Lifetime Learning Credit does not require half-time attendance (consider the adult learner)
- The maximum credit is $2,000 per tax return per year regardless of how many students attend.
- Calculated using 20% of a maximum of $10,000 total qualifying education expenses
Tuition & Fees Deduction
- This is a deduction, not a credit.
- Maximum deduction of $4,000 per tax return
- Unlike the credits, this deduction helps save Michigan income taxes as well as federal.
- Marginal tax bracket drives the credit-vs.-deduction decision (choose the optimal benefit)
Student Loan Interest Deduction
- Deduction available for interest paid on student loans up to a maximum of $2,500
- Only a taxpayer who is not claimed as a dependent of another may get the deduction.
Coordination with Other Benefits
- No double-dipping!
- Expenses paid with distributions from 529 plans and Coverdell Education Savings Accounts cannot be used for credits and deductions.
- Expenses covered by tax-free scholarships cannot be used to calculate tax benefits.
Consult IRS Publication 970, Tax Benefits for Education: https://www.irs.gov/pub/irs-pdf/p970.pdf
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