Federal Education Tax Benefits

Produced by Deborah Harris, Massachusetts Law Reform Institute, and Ruthie Liberman, Crittenton Women’s Union
Created October 2010

When you file your federal income taxes, you may be able to receive
a higher refund or owe less money if you have paid for tuition, books,
supplies, or equipment for a college class or for training to get a job. These
benefits are available for classes you took or for classes your dependents
took.

Q1: Am I eligible for federal education tax benefits?

There are two different federal education tax benefits. One
is a tax credit; the other is a tax deduction. Each has different rules. You
can only take one or the other, not both.

A tax credit directly reduces the amount of federal tax you
owe, which may increase your refund. There are two different education tax
credits available—American Opportunity Tax Credit and the Lifetime Learning
Credit.

The other type of education tax benefit is the Tuition and
Fees Deduction. This deduction reduces the amount of your taxable income, from
which the amount of tax you owe is determined.

The credits are usually more favorable than the deduction,
but it varies from person to person. To determine which is best for you, compute
a rough draft of your tax return using the tax reduction and each of the tax
credits. You can take the Tuition and Fees Deduction even if you do not itemize
your deductions.

Rules may vary from year to year. You should check with a
tax advisor before filing for one of these education tax credits. Here are the
rules for tax year 2009 and 2010:

Tax Code Program

You are eligible if ALL of the following are true:
American Opportunity Tax Credit (AOTC)

(This is a temporarily expanded version of the Hope tax
credit.)

.

  • Your income is below $90,000 if you are single, and $180,000 if
    you are married;
  • You paid for tuition, books, supplies, or equipment. (Room and
    board do not count.)
  • You paid for tuition, books, supplies or equipment during the
    tax year, and the course either started that year or by March of the
    following year.
  • You were enrolled at least half time.
  • This was part of your first four years of education after
    graduating high school or receiving a GED.
  • You attended an institution that is eligible. (You can check
    with the school to make sure.)
  • You are working towards a degree or credential.
  • You have not already taken the HOPE and/or AOTC tax credit four
    times in the past.
  • You do not have any felony drug convictions.
  • You cannot claim this deduction if you are married but filing
    separately instead of jointly, if someone else can claim you as their
    dependent, or if you were a nonresident alien.
Lifetime Learning Credit
  • Your income is below $60,000 if you are single, or $120,000 if
    you are married.
  • You paid tuition or required fees. (Books, supplies, room, and
    board do not count.)
  • You paid the school directly, and those expenses were required
    for the student to enroll.
  • You paid for tuition, books, supplies or equipment during the
    tax year, and the course either started that year or by March of the
    following year.
  • You attended an institution that is eligible. (You can check
    with the school to make sure.)
  • The course does not have to count towards a degree if it will
    improve job skills.
  • You can take this credit every year you are eligible. There is
    no limit to the number of years you can claim it.
  • Students with felony drug convictions are eligible.
  • You cannot claim this deduction if you are married but filing
    separately instead of jointly, if someone else can claim you as their
    dependent, or if you are a nonresident alien.

Tuition and Fees Deduction

Your income is below $80,000 if you are single, or $160,000 if
you are married.

You paid tuition, or fees required for enrollment. (Room and
board do not count, and books count only if the school requires that you buy
them from the school as a condition of enrolling.)

You paid the school directyl, and those expenses were required
for the student to enroll.

You paid for tuition or fees during the tax year, and the course
either started that year or by March of the following year.

Your class was at the undergraduate or graduate level.

You attended an institution that is eligible. (You can check
with the school to make sure.)

You cannot claim this deduction if you also claim the American
Opportunity Tax Credit or Lifetime Learning Credit for the same student.

You cannot claim this deduction for expenses paid with tax-free
funds, such as a tax-free scholarship, employee benefit, or portions of
distributions from certain educational savings accounts or tuition plans.

Students with felony drug convictions are eligible.

You cannot claim this deduction if you are married but filing
separately instead of jointly, or if someone else can claim you as their
dependent.

Q2: By how much can I reduce the amount I owe or
increase my refund?

Even if you do not owe any tax, the American Opportunity Tax
Credit may increase your refund. You can get up to $1,000 more in your refund
if you are older than age 24, or if you are between ages 18 and 24, but provide
at least half your own support.

If you owe tax, then you can reduce the amount by up to
$2,500 per student with the American Opportunity Tax Credit or up to $2,000
with the Lifetime Learning Credit. The amount you are eligible for depends on
how much you spent. In some cases, it also depends on your income.

The Lifetime Learning Credit only reduces the amount you
owe. If you do not have to pay taxes, then this benefit will not help you. It
is worth up to $2,000, depending on how much you spent, how much tax you owe,
and your income.

The Tuition and Fees Deduction can reduce the amount of your
income that is taxable up to $4,000. The impact on the amount of tax you owe
is much less than $4,000 and depends on your income.

Q3: Which of the tax benefits should I take?

The benefits have different rules. You may qualify for one
but not the other. If you qualify for all three, you can calculate your
benefit each way and see which is larger. The American Opportunity Tax Credit
will often be worth more than the Lifetime Learning Credit, but it depends on
how much you spent and your income.

The credits usually provide a larger benefit than the
Tuition and Fees Deduction, but you can try that too to make sure you get as
much money back as possible. When you compute your taxes, try all the
possibilities to see which gives you the largest refund or reduces the amount
you owe the most.

Remember: You can take only one of the tax credits or the
Tuition and Fees Deduction.

Q4: Where can I get help completing my tax forms?

If you worked and earned less than $49,000 during the year,
you may qualify for free tax preparation assistance. In Boston, contact the Boston Earned Income Tax Credit (EITC) Coalition at 617.918.5275. Contact your
city or town hall if you need assistance outside of Boston. Find a free tax site at MassCashback

Q5: Am I eligible for tax benefits if I still live
with my parents?

If your parents (or someone else) claim you as a
dependent on their taxes, then they are eligible for your education tax
credits. If you file your own taxes and take an exemption for yourself, then
you are eligible for education tax credits.

The rules for claiming the Tuition and Fees Deduction are more
complicated than the rules for claiming the credits. In most cases, the person
claiming the student as a dependent must also have paid for the educational
expenses in order to claim the Tuition and Fees Deduction. If you are filing
your own taxes and have paid your own educational expenses, then you are
eligible to take the deduction.

Q6: Am I eligible for tax benefits if I am paying for
school with loans or scholarships?

If you paid with loans, it is the same as if you paid with
your own cash. This means that you should be able to claim the amounts you
paid for your education by using school loans.

If you are repaying loans that you used to pay for education
in previous years, you are not eligible to claim those payments in the current
year. Instead, you may be eligible for the Student Loan Interest Deduction.

If you are paying for school with a scholarship, it depends on
the type of scholarship. Some scholarships are tax-free (mostly government
grants). If a scholarship is tax-free, you cannot claim this money as an
education tax credit or a Tuition and Fees Deduction. If the scholarship is
taxable, you must include it as income on your tax form, and you are eligible
for the education tax benefits.

Q7: What should I do if I am paying for more than one
student?

For each student, you can only claim one of the benefits.
You do not have to claim the same benefit for each student. For example, you
could take the American Opportunity Tax Credit for your child and the Lifetime
Learning Credit for yourself, or you could both take the American Opportunity
Tax Credit if you qualify.

Q8: What if I paid for school in the past, but didn’t
claim a tax credit? Is it too late for me to get a tax refund or reduction for
past years?

You can file an amended tax return by using federal Form
1040-X. If you want to change a return you just submitted, wait until you
receive your refund (if you were already getting one), and then file Form 1040-X.
You can get the form and instructions online from Ten Facts about Amended Returns on the IRS website. In general, you can receive
refunds from the IRS if you file Form 1040-X within three years from the date
you filed your original tax return, or two years from the date you paid the tax—whichever
is later.

If you want to claim educational expenses for multiple
years, complete a different form for each year and mail them in separate envelopes.
If you amend your federal return, you may also need to amend your state
return. The Massachusetts state form to amend your taxes is available at The Department of Revenue's website, “Forms and Publications” in the left-hand column.

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