Education Tax Credits & Deductions in 2012




Update: the 2013 & 2014 education tax credits & deductions have since been posted. This article is focused on 2012.

It’s back to school week for many students. This post should be timely for those of you still working on your education.

I haven’t had to spend much time thinking about education tax credits and deductions until now as I never earned enough taxable income while going to school. Now that my wife and I file jointly vs. separately, we have good reason to be a little more interested.

My wife is going through an accelerated nursing degree program at a local community college this year. So I’ve taken it upon myself to research the education tax credits and deductions for the 2012 tax year. I thought I would share what I found for those who are interested.

American Opportunity Tax Credit

The American Opportunity Tax Credit is the big student tax credit in 2012.

It is a modification to the Hope Credit under the American Recovery and Reinvestment Act (ARRA) for 2009 and 2010. It was then extended into 2011 and 2012 under the Tax Relief and Job Creation Act of 2010. This will be its last year, unless there is another extension. And it’s a healthy credit, you will definitely want to take advantage of if you’re a student.

It’s a bit different than the Hope Credit in that it can be claimed for four years of post-secondary education instead of just two. It’s also different than the Lifetime Learning tax credit, which I will detail later in this article.

Here is a rundown of how this education tax credit works and who is eligible:




  • education tax creditEligibility: The student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential for at least one academic period beginning during the tax year.
  • Credit Amount: The American Opportunity Tax Credit is up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year per eligible student.
  • How to Claim: Determine your eligibility, credit amount, and claim the credit by filling out IRS Form 8863.
  • Refundability: 40% of the credit (up to $1,000) is refundable. This means you can get a refund even if you owe no tax.
  • Income Limits: a taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot claim the credit.
  • School Eligibility: You can only claim the credit if you’re attending an accredited institutions. You can search the U.S. Department of Education’s database of accredited institutions to confirm eligibility.
  • Credit can be Received for: Tax credit can be received for 100% of the first $2,000, plus 25% of the next $2,000 that has been paid during the taxable year for tuition, and required fees and course materials.
  • Ineligible Expenses: You cannot receive a credit for: room and board, insurance, transportation, expenses paid with tax-free assistance, medical expenses, expenses used for another deduction or credit, and student fees that are not required as condition of enrollment or attendance.

Lifetime Learning Credit

The other big education tax credit out there is the Lifetime Learning Credit. You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit within the same calendar year for the same student (although you could for two different students). So what’s the difference between the two credits?

Lifetime Learning Credit Vs. American Opportunity Credit

The Lifetime Learning Credit is similar to the American Opportunity Credit, but with a a few key differences. Mainly, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope credit was claimed counts toward the 4 years. However, there is no limit on the number of years for which you can claim a Lifetime Learning credit based on the same student’s expenses.

The Lifetime Learning credit is also non-refundable, whereas the American Opportunity is partially refundable. And it has a $2,000 maximum vs. $2,500. And finally, it has lower income limits. For those three reasons, the American Opportunity Credit is the superior of the two and should be the default, if it can be claimed.

Here is a rundown of how Lifetime Learning education tax credit works and who is eligible:

  • Eligibility: an eligible student is a student who is enrolled in one or more courses at an eligible educational institution.
  • Credit Amount: $2,000 of the cost of tuition, fees and course materials paid during the taxable year per tax return.
  • How to Claim: Determine your eligibility, credit amount, and claim the credit by filling out IRS Form 8863.
  • Refundability: This credit is non-refundable. This means you cannot get a refund if you owe zero tax.
  • Income Limits: a taxpayer whose modified adjusted gross income is $51,000 or less ($102,000 or less for joint filers) can claim the credit for the qualified expenses on a tax return. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $61,000 ($122,000 for joint filers) cannot claim the credit.
  • School Eligibility: Available for all years of post-secondary education and for courses to acquire or improve job skills. Does not need to be an accredited institution.
  • Credit can be Received for: Tax credit can be received for 20% of the first $10,000 for tuition, and required fees and course materials.
  • Ineligible Expenses: You cannot receive a credit for: room and board, insurance, transportation, expenses paid with tax-free assistance, medical expenses, expenses used for another deduction or credit, and student fees that are not required as condition of enrollment or attendance.

Tuition and Fees Education Tax Deduction

If you are not eligible for either tax credit, you might be eligible for a tuition and fee education tax deduction. You cannot claim a deduction on the same expenses that you have claimed a credit for. I cannot foresee a reason why you would opt for a tax deduction if you were eligible for a tax credit, as tax credits are superior to deductions. A credit subtracts the amount of taxes you owe, while a deduction subtracts your taxable income.

You would be able to claim a tax deduction if your income surpassed the Lifetime Learning credit thresholds.

  • Eligibility: The student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential for at least one academic period beginning during the tax year.
  • Deduction Amount: Up to $4,000 of the cost of tuition, fees and course materials paid during the taxable year per tax return.
  • How to Claim: Fill out form 1040, Schedule A to itemize your deductions.
  • Income Limits: a taxpayer whose modified adjusted gross income is $65,000 or less ($130,000 or less for joint filers) can claim the deduction for the qualified expenses of an eligible student or for work related expenses. The deduction is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $80,000 ($160,000 for joint filers) cannot claim the credit.
  • Ineligible Expenses: You cannot receive a credit for: room and board, insurance, transportation, expenses paid with tax-free assistance, medical expenses, expenses used for another deduction or credit, and student fees that are not required as condition of enrollment or attendance.

Disclaimer:

As much as I’d love to be (OK, not really), I’m not a tax pro, so I’d definitely recommend you refer to one or at least read through the IRS documentation on your own as well.

Have you taken advantage of any of the above education tax credits or deductions?

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