What Educational Expenses Are Tax Deductible?

There is a space for education-related deductions on form 1040 that is separate from the itemized deductions.
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In the not-too-distant past, April was the time at which those who paid school tuition and other expenses were wondering what education expenses are tax-deductible. While an individual's personal circumstances often determined what did or didn't qualify as a legitimate education deduction, there were some general guidelines.

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In 2021, Congress passed the American Rescue Plan, which changed some rules on tax breaks for educational costs. While this plan did away with the deduction for tuition and other education-related expenses, it expanded the income limits for those who can receive the lifetime learning credits.

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Read more:Tax Credits: What Are They & How Do You Qualify?

Rule Changes on Tax Breaks for Qualified Education Expenses

Changes in tax breaks for qualified education expenses were part of the American Rescue Plan, which was a pandemic relief measure that was signed into law in March 2021. Two primary aspects of the plan relate to the American Opportunity Credit and the Lifetime Learning Credit.

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American Opportunity Credit

The American Opportunity Credit (AOC) allows a taxpayer – the student or her parent(s) – to decrease her tax bill by as much as ​$2,500​, assuming that the student spent $2,500 or more in the pursuit of an undergraduate degree.

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In this case, an undergraduate or her parent(s) can claim the ​first $2,000​ of the student's tuition payments, school fees, and the costs of books and other supplies, plus ​25 percent​ of any additional costs, excluding transportation and living expenses, up to an additional $2,000. Consequently, the undergrad or the parent(s) can claim a total of $2,500 for the year.

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Individuals Eligible to Claim the Tax Credit

The intent of the AOC is to lessen the financial burden for the student or the parent(s) who pays for the education of the undergraduate. That taxpayer, be she a student or parent(s), can claim the tax credit each of the four years that's typically required to complete studies for an undergraduate degree. For a student's parent(s) to claim the credit, the student must be listed on the tax return as a dependent.

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Amount of Tax Credit Claimed

The amount of the tax credit that a taxpayer can claim is limited by her modified adjusted gross income (MAGI). To claim the full tax credit of $2,500, the MAGI of the payer, whether the student or the parent, must be ​$80,000​ or less in 2021. In contrast, the income of the paying parents who file taxes jointly must be ​$160,000​ or less to claim the full credit.

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If the MAGI of the student or single parent is ​more than $80,000 but less than $90,000​, the tax credit the taxpayer can claim is reduced. The same is true for parents who file jointly and earn ​more than $160,000 but less than $180,000​. The tax credit is not available to those whose incomes exceed those amounts.

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Effect of the American Opportunity Credit

The American Opportunity Credit decreases the tax bill for the taxpayer who funds the undergraduate's education. For instance, if the taxpayer who owes $5,000 in taxes for 2021 receives the maximum $2,500 credit, that person's payment to the IRS will be only $2,500.

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Taxpayer Income and the AOC

Regardless of whether the person who funds the education of an undergraduate has no income during 2021 and thus owes no taxes, she will receive ​40 percent​ of the tax credit's value, or ​$1,000​. For instance, assume a student earned no income in 2021, but paid her undergraduate tuition and other costs. Because she qualifies for the American Opportunity Credit, she will receive $1,000.

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Read More:Education Credit Vs. Tuition Deduction

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) allows a taxpayer student or parent to decrease her tax bill by as much as ​20 percent​ of the ​first $10,000​ of school tuition and fees (excluding living and transportation expenses), or $2,000.

Individuals Eligible to Claim the LLC

The intent of the LLC is to lessen the financial burden for the student or the parent(s) who pays for the education of the undergraduate, graduate, non-degree or vocational student. That taxpayer can claim the tax credit each year the student takes a course to enhance her skills. For a student's parent(s) to claim the credit, the student must be listed on the tax return as a dependent.

While a taxpayer can claim both the American Opportunity Tax Credit and the Lifetime Learning Credit, she can't do so in the same year.

Amount of Life Learning Credit Claimed

The amount of the tax credit that a taxpayer can claim is limited by her modified adjusted gross income (MAGI). To claim the full tax credit of $2,000, the MAGI of the payer, whether the student or the parent, must be ​$59,000​ or less in 2021. In contrast, the income of the paying parents who file taxes jointly must be ​$118,000​ or less to claim the full credit.

If the MAGI of the student or single parent is ​more than $59,000 but less than $69,000​, the tax credit the taxpayer can claim is reduced. The same is true for parents who file jointly and earn ​more than $118,000 but less than $138,000​. The tax credit is not available to those whose income exceeds those amounts.

Effect of the Life Learning Credit

The Life Learning Credit decreases the tax bill for the taxpayer who funds the education or training. For instance, if the taxpayer owes $5,000 in taxes for 2021 and receives the maximum $2,000 credit, that person's payment to the IRS will be only $3,000.

Taxpayer Income and the LLC

To receive the Lifetime Learning Credit, the individual must have earned income and owe taxes.

Education Tax Forms

In January of the tax filing year, the student's university or training school will send the responsible party a Form 1098-T, which is a tuition statement that shows the education expenses paid for the year. The responsible party and taxpayer will use the information reported on the form to claim the tax credit.

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