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The IRS offers three tax breaks for education costs like tuition
Qualified education expenses primarily include tuition, but also costs that are required for you to enroll in a course or program
You will probably receive a copy of Form 1098-T from each school where you have eligible expenses
The tuition and fees deduction, available to all taxpayers, allows you to deduct up to $4,000
The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) are tax credits that reimburse education expenses
Qualified education expenses include tuition and other expenses that are necessary for you to pay in order to enroll in a course or program. Nonessential fees, like transportation costs or room and board, are not included.
Expenses at most accredited postsecondary institutions are eligible, including public, private, nonprofit, and for-profit schools. If your expenses are eligible, you will most likely get a Form 1098-T, Tuition Statement, from the institution.
There are three possible ways to deduct qualified education expenses on your tax return. The tuition and fees deduction is available to all taxpayers. Then there are two education credits you can claim: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC). Notably, the LLC allows you to include the cost of a course meant to learn or improve job skills.
All three tax breaks have income limits and claiming any of them requires you to attach at least one additional form to your Form 1040 (the main tax return form).
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A qualified education expense is money you spend for college tuition, enrollment fees, and any other expenses that are required for you to attend or enroll in an educational program at an eligible educational institution. An example of another cost that may qualify is a student activity fee that all students must pay.
If you have qualified expenses, you will most likely receive a Form 1098-T, Tuition Statement, from each of the schools where you had eligible expenses.
For the American opportunity tax credit (more on that later), you can include your expenses for books, class supplies, and equipment that you need for a course. They are eligible even if you didn’t pay them directly to the school.
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Educational expenses only qualify if you spend them at an eligible institution. An eligible educational institution is any university, college, trade school, or other postsecondary educational institution that is eligible to participate in a student aid program run by the U.S. Department of Education.
Most accredited postsecondary institutions are eligible. That includes public, nonprofit, and private for-profit institutions. If your school qualifies, it is most likely on the Free Application for Federal Student Aid (FAFSA) code list. (You may need to download the FAFSA code list as a spreadsheet in order to see it.) You can also just ask your school if it’s an eligible educational institution for tax purposes.
For the lifetime learning credit (LLC), your expenses qualify if they’re for courses you take to improve job skills or acquire new skills.
Most fees outside of tuition do not qualify as education expenses. The following expenses are not qualified education expenses:
There are three ways that you may be able to use your education expenses to lower your federal income taxes:
The AOTC and LLC are both considered education credits and the IRS has one form that allows you to apply for both of them. If you qualify for the LLC, you likely qualify for the AOTC, but the reverse isn’t always true.
When you file a state income tax return, your state may have its own version of these three tax breaks. States may also offer additional tax breaks for education expenses.
(Learn more about the difference between tax deductions and credits.)
The deduction for tuition and fees is available for qualified education expenses you incurred for yourself, your spouse, or a dependent. This deduction is available to everyone who qualifies because it is an above-the-line deduction; you do not need to itemize deductions to claim it.
The tuition and fees deduction is worth up to $4,000 and is only available if your modified adjusted gross income (MAGI) is $80,000 or less for single filers and $160,000 or less for joint filers.
To claim this deduction, you need to attach two forms to your tax return: Schedule 1 and Form 8917, Tuition and Fees Deduction. This deduction has been eliminated in the past, only to be brought back, and is available for expenses at least through 2020.
The AOTC is available for qualified education expenses for your first four years of higher education. Unlike the other deductions and credits mentioned, qualified education expenses for the AOTC include your spending on books, classroom supplies, and any other classroom equipment you need for a course. You can include these expenses even if you didn’t pay them directly to the school.
The maximum annual AOTC is $2,500 per student, which is calculated as 100% of your first $2,000 of qualified expenses and then 25% of your next $2,000 expenses. That means you need to have at least $4,000 of expenses to qualify for the maximum deduction. The AOTC is also a refundable credit, so if it brings the amount of annual tax you owe down to zero, you can receive a refund of the remaining credit, up to $1,000.
There are also income limits for the AOTC. The full credit is only available if your MAGI is $80,000 or less for single filers and $160,000 or less for joint filers. The maximum credit you can get then decreases as your income increases. You can not claim the AOTC if your MAGI is $90,000 or more for single filers and $180,000 or more for joint filers.
Claim the AOTC by completing Schedule 3 and Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
The LLC is a tax credit you can claim for tuition and similar expenses from undergraduate courses, graduate courses, and professional degree courses. The LLC also covers the cost of classes you take to improve your job skills or acquire new skills.
There is no limit to how many years you can claim the lifetime learning credit. It's worth 20% of your first $10,000 of qualified education expenses, so the LLC is worth a maximum of $2,000 per return. The LLC is not refundable, which means it can only decrease the amount of annual tax you owe to $0 and you cannot get a refund from it.
The value of the LLC is also limited by your income. For your 2019 taxes, which you file in early 2020, you can claim up to the full credit if your MAGI is $58,000 or less for single filers and $116,000 or less for joint filers. Then the maximum credit you can claim is reduced as your MAGI increases. You can’t claim the LLC once your MAGI reaches $68,000 for single filers or $136,000 for joint filers.
(In 2020, the lifetime learning credit income threshold is $59,000 to $69,000 for single filers and $118,000 to $138,000 for joint filers. These are the taxes you file in early 2021.)
To claim the lifetime learning credit, complete Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) and attach it to your tax return.
For more help filing your taxes, check out our guide on how to file taxes.
The student loan interest deduction is available for people with student loan debt. This deduction isn’t for your school expenses, but your student loans only qualify for the deduction if they were used for qualified education expenses.
About the author
Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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