Education Tax Credits & Deductions: Updated for 2017 & 2018




The readership here is heavy on those completing school for the first time and going back to school to further their education. So I’ve updated this post to reflect the 2017 tax year (with notes on what changes for 2018 with the 2018 Congressional budget deal).

The good news is that if you’re paying for school (for yourself or others), there are a many education tax credits and deductions available to you – some of which were recently retroactively and permanently extended as part of the tax extender legislation in a previous Congressional budget deal. And the above-line tuition and fees tax deduction (up to $4,000) was restored as part of the 2018 budget deal (but not indefinitely)

A few years back, my wife recently returned to school to complete a post-secondary accelerated nursing degree program, without any government or other assistance. While comparatively inexpensive – she went the community college route – it was still a big out of pocket cost.

During that time, I researched the various education tax credits and deductions available to us and have shared a summary here to help others. In recent years, there has been some changes in what deductions and credits are available. Some were extended with congressional budget agreements, while others were left behind.

In this post, I’ll recap the education tax credits and deductions available for the 2017 tax year.

American Opportunity Credit

education tax creditsThe American Opportunity Tax Credit is the major student tax credit available. This tax credit had been set to expire at the end of 2017, but was permanently extended through an extender legislation passed by Congress.

Many of you will remember the “Hope Credit”. The American Opportunity Credit is actually a modified replacement to the Hope Credit that was created under the American Recovery and Reinvestment Act (ARRA). 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.

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




  • 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. Also, the student had not completed the first four years of post-secondary education – so grad students cannot take this credit.
  • Credit Amount: 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. New this year: To claim the American opportunity credit, you must provide the educational institution’s employer identification number (EIN) on your Form 8863. You should also file form 1098-T, which you should receive early in the year from your educational institution.
  • 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 any of 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 claim both 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. 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 Credit is partially refundable. And it has a $2,000 maximum vs. $2,500 for the AOC.

Finally, the Lifetime Learning Credit has lower income maximum limits, in order to remain eligible. 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: Student does not need to be pursuing a degree or other recognized education credential.
  • Credit Amount: up to $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 $56,000 or less ($112,000 or less for joint filers) in 2017 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 $66,000 ($132,000 for joint filers) cannot claim the credit. These limits are indexed to inflation and change annually.
  • 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.

Student Loan Interest Deduction

You may be able to deduct interest you pay on a qualified student loan. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid.

The deduction is claimed as an above-line adjustment to income so you do not need to itemize your deductions.

You can claim the deduction if all of the following apply:

  • You paid interest on a qualified student loan in the tax year you are filing for.
  • You are legally obligated to pay interest on a qualified student loan.
  • Your filing status is not married filing separately.
  • Your modified adjusted gross income is less than $80,000 ($165,000 if married filing jointly). The deduction is reduced (phased out) when your modified adjusted income is between $65,000 and $80,000 when filing as single, head of household, or qualifying widower (and between $135,000 and $165,000 for filing married filing jointly).
  • You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return.
  • You have received form 1098-E from the educational institution for filing purposes, for those who paid over $600 in interest.

Tuition and Fees Education Tax Deduction

education tax deductionIf you are not eligible for the American Opportunity Credit or the Lifetime Learning Credit, you might be eligible for a tuition and fee education tax deduction. The education tax deduction was retroactively restored as part of the extenders legislation passed by Congress for 2017. It would require another restoration at the end of 2018 if it is to continue.

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

Note that you cannot double-dip and 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.

  • 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. This deduction is an above-line adjustment to income, which means you can claim this deduction even if you do not itemize deductions on Schedule A.
  • How to Claim: Fill out your 1040 and add form 8917.
  • 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 capped at $2,000 if a taxpayer’s modified adjusted gross income exceeds those amounts up to a modified adjusted gross income of $80,000 ($160,000 for joint filers), above which taxpayers 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.

Tax Advantaged 529 Plans and Coverdell Education Savings Accounts

Coverdell Education Savings Accounts and 529 Plans are tax advantaged savings accounts for education expenses. I highlight both at length in the referenced links, but to summarize, each allows you to contribute savings for future education expenses, with earnings and distributions being tax-free for qualified expenses.

One big controversial change for 2018 under the Republican Tax Reform is that families can now withdraw up to $10,000 tax-free per year for K-12 at private or parochial schools. Previously, ESA’s could be used for this, but contributions were capped at $2,000 per year. If you have an ESA, you can roll it over to a 529, tax-free.

Disclaimer:

Please keep in mind that 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. For more information, definitely check out IRS publication 970: Tax Benefits for Education and rely on a tax professional or tax software to walk you through eligibility.

Education Tax Credit & Deduction Discussion:

  • Have you taken advantage of any of the above education tax credits or deductions?
  • Does the expiration of the education tax deduction impact you this year?

Related Posts:

8 Comments

  1. Matt
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  3. Matthew Wiley
    • Bruce Varney
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