Tax credit vs. tax deduction
A tax credit is more valuable than a tax deduction of the
same amount. Why? A tax credit reduces any taxes owed on a dollar-for-dollar
basis, whereas a tax deduction simply reduces the total income on which your
taxes are based.
Education Tax Credits and Deductions
For parents and students trying to manage college bills and
student loan payments, the federal government offers education-related tax
benefits. The requirements for each are different, so here's what you need to
American Opportunity credit
The American Opportunity credit (formerly the Hope credit) is a tax
credit available for the first four years of a student's undergraduate
education, provided the student is attending school at least half-time in a
program leading to a degree or certificate. The credit is worth up to $2,500 in
2019 (it's calculated as 100% of the first $2,000 of qualified expenses plus
25% of the next $2,000 of expenses). The credit must be taken for the tax year
that the expenses are paid, and parents must claim their child as a dependent
on their tax return to take the credit.
To be eligible for the credit, your income must fall below
certain limits. In 2019, a full credit is available to single filers with a
modified adjusted gross income (MAGI) below $80,000 and joint filers with a
MAGI below $160,000. A partial credit is available to single filers with a MAGI
between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and
One benefit of the American Opportunity credit is that
it's calculated per student, not per tax return. So parents with two (or more)
qualifying children in a given year can claim a separate credit for each child
(assuming income limits are met).
The mechanics of claiming the credit are relatively easy. If
you paid tuition and related expenses to an eligible educational institution
during the year, the college generally must send you a Form 1098-T by February
1 of the following year. You then file Form 8863 with your federal tax return
to claim the credit.
Lifetime Learning credit
The Lifetime Learning credit is another education tax
credit, but it has a broader reach than the American Opportunity credit. As the
name implies, the Lifetime Learning credit is available for college or graduate
courses taken throughout your lifetime (the student can be you, your spouse, or
your dependents), even if those courses are taken on a less than half-time
basis and don't lead to a formal degree. However, this credit can't be taken in
the same year as the American Opportunity credit on behalf of the same student.
The Lifetime Learning credit is worth up to $2,000 in 2019
(it's calculated as 20% of the first $10,000 of qualified expenses). The
Lifetime Learning credit must be taken for the same year that expenses are
paid, and you must file Form 8863 with your federal tax return to claim the
credit. In 2019, a full credit is available to single filers with a MAGI below
$58,000 and joint filers with a MAGI below $116,000. A partial credit is
available to single filers with a MAGI between $58,000 and $68,000 and joint
filers with a MAGI between $116,000 and $136,000.
Unlike the American Opportunity credit, the Lifetime
Learning credit is limited to $2,000 per tax return per year, even if more than
one person in your household qualifies independently in a given year.
If you have more than one family member attending college or
taking courses at the same time, you'll need to decide which credit to take.
Joe and Ann have a college freshman and sophomore, Mary and Ben, who are attending school full-time. In addition,
Joe is enrolled at a local community college taking two graduate courses related
to his job. Mary and Ben each
qualify for the American Opportunity credit. Plus, Mary, Ben, and Joe each
qualify for the Lifetime Learning credit. Because the American Opportunity credit
isn't limited to one per tax return, Joe and Ann should claim this credit for both Mary and Ben, and then claim a Lifetime Learning credit
for Joe. Joe and Ann can claim both the American
Opportunity credit and the Lifetime Learning credit in the same year because
each credit is taken on behalf of a different qualified student.
Student loan interest deduction
The student loan interest deduction allows borrowers to
deduct up to $2,500 worth of interest paid on qualified student loans.
Generally, federal student loans, private bank loans, college loans, and state
loans are eligible. However, the debt must have been incurred while the student
was attending school on at least a half-time basis in a program leading to a
degree, certificate, or other recognized educational credential. So loans
obtained to take courses that do not lead to a degree or other educational
credential are not eligible for this deduction.
Your ability to take the student loan interest deduction
depends on your income. For 2019, to take the full $2,500 deduction (assuming
that much interest is paid during the year) single filers must have a MAGI of
$70,000 or less and joint filers $140,000 or less. A partial deduction is
available for single filers with a MAGI between $70,000 and $85,000 and joint
filers with a MAGI between $140,000 and $170,000.
Also, to be eligible for the deduction, an individual must
have the primary obligation to pay the loan and must pay the interest during
the tax year. The deduction may not be claimed by someone who can be claimed as
a dependent on another taxpayer's return. Borrowers can take the student loan
interest deduction in the same year as the American Opportunity credit or
Lifetime Learning credit, provided they qualify for each independently.
Deduction for qualified higher education expenses
The deduction for qualified higher education expenses is not available in 2019 (or 2018) but was for tax year 2017. In 2017, it was worth up
to $4,000 for out-of-pocket qualified higher education expenses paid during the year; single filers with a modified gross income (MAGI) of $65,000 or
less and joint filers with a MAGI of $130,000 or less could take the full $4,000
deduction. A $2,000 deduction was available for single filers with a MAGI
between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and
Comparison of Credits/Deductions
|MAGI limits for 2019||Qualified expenses
American Opportunity credit
Single filer: $80,000 or less for full credit; partial credit if MAGI $80,000 to $90,000
Joint filer: $160,000 or less for full credit; partial credit if MAGI $160,000 to $180,000
|Tuition and fees, plus course materials
Lifetime Learning credit
Single filer: $58,000 or less for full credit; partial credit if MAGI $58,000 to $68,000
Joint filer: $116,000 or less for full credit; partial credit if MAGI $116,000 to $136,000
|Tuition and fees only
Student loan interest
Single filer: $70,000 or less for full deduction, partial deduction if MAGI $70,000 to $85,000
Joint filer: $140,000 or less for full deduction; partial deduction if MAGI
$140,000 to $170,000
|Tuition and fees, room and board, books,
equipment, and other necessary expenses
Deduction qualified higher education
$4,000 (full); $2,000 (partial)
Deduction not available in 2019
|Tuition and fees only|
For more information,
see IRS Publication 970.