The Internal Revenue Service offers college students several tax breaks to help offset the high costs of education. College students can claim education credits that reduce their tax liability and deductions to lower their taxable income. At the time of publication, students can choose between claiming the American Opportunity Credit and Lifetime Learning Credit. You can also deduct the student loan interest you paid during the year. If you choose to combine an education credit and interest deduction, you must meet the eligibility criteria to claim each separately.
Claiming a Credit and Deduction
If you paid your college tuition and other education expenses with a student loan, you may deduct the interest and still qualify for an education credit. Because a student loan is not considered tax-free education assistance like a scholarship or grant, you do not need to subtract the loan amount from the out-of-pocket expenses paid. Although you can claim student loan interest along with the education credits, you cannot claim more than one education credit per year. The interest deduction and credits are not available to married taxpayers who file separate returns.
The student loan interest deduction allows you to claim interest you paid on a student loan for yourself, spouse or dependent. You must be legally obligated to repay the loan and have made the payments. If your parent is making the payments, you cannot claim the deduction, even if the loan is in your name. The deduction allows you to reduce your taxable income by the interest you paid on the loan for the year, up to $2,500. Any up-front fees you had to pay to receive the loan, including origination fees, are deductible over the life of the loan. You can claim the deduction even if you claim the standard deduction instead of itemizing. At the time of publication, single filers with a modified adjusted gross income below $60,000 and joint filing married couples with incomes below $125,000 are eligible for the full deduction. The deduction begins to phase out for filers with higher incomes. No deduction is allowed for single filers with incomes over $75,000 and married couples with combined incomes greater than $155,000.
American Opportunity Tax Credit
You can claim the American Opportunity Tax Credit for the first four years of college. The credit is worth a maximum of $2,500 per year. If you do not owe taxes, you can receive a refund of up to $1,000 from the refundable portion of the credit. To qualify, your modified adjusted income cannot exceed $80,000 if you are single or $160,000 if you are married. The credit is completely phased out for single filers at $90,000 and married couples at $180,000. In addition to covering tuition and required fees, the credit allows you to declare course materials, such as books, supplies and equipment necessary for enrollment. Under the credit, you can claim 100 percent of the first $2,000 you spent on tuition and qualifying expenses and 25 percent of the next $2,000 spent.
Lifetime Learning Tax Credit
If you cannot claim the American Opportunity credit, you may qualify for the Lifetime Learning Tax Credit. You can claim the credit for an unlimited number of years. According to the IRS, you do not need to be participating in a program leading to a degree. You can claim the credit even if you paid for courses to acquire a job or improve job skills. There is no minimum number of required credit hours to qualify. Unlike the American Opportunity Credit, a felony drug conviction does not affect eligibility. The credit is not refundable, so if your tax liability is zero, it will not result in a refund. Under the credit, you can claim 20 percent of your total annual education expenses up to $10,000. At the time of publication, single filers cannot exceed a modified adjusted gross income of $62,000, and married couples are limited to $124,000
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.