Education related deductions

Tax credits and deductions for education

1) Start with the big picture: credit vs. deduction

A tax credit reduces your tax bill directly, dollar for dollar. A tax deduction reduces your taxable income, which may lower the tax you owe. The education benefits most people look at are the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC), and the student loan interest deduction. 

The costs for continuing education can add up quickly and get expensive. There are several tax benefits such as credits and deductions that can help eligible taxpayers reduce these costs. A tax credit reduces the amount a person owes in income taxes dollar-for-dollar. Let’s look at a few of the most common ones.

Education tax credits
There are two tax credits designed to help taxpayers reduce education costs: the American Opportunity Tax Credit and the Lifetime Learning Credit.

The taxpayer can claim one or the other but not both. Taxpayers must complete Form 8863, Education Credits and file it with their federal tax return.
To be eligible for either credit:

• The taxpayer, dependent or a third party paid qualified education expenses for post high school education.
• An eligible student must be enrolled at an eligible educational institution.
• The eligible student is the taxpayer, taxpayer’s spouse or a dependent listed on the tax return.

Key points for AOTC and LLC
The AOTC is:

• Worth a maximum benefit of up to $2,500 per eligible student
• Available only for the first four years at an eligible college or vocational school
• For students pursuing a degree or other recognized education credential
• Partially refundable. People could get up to $1,000 back

The LLC is:

• Worth a maximum benefit of up to $2,000 per tax return, per year
• Available for all years of postsecondary education and for courses to acquire or improve job skills
• Available for an unlimited number of tax years

Education related deductions
Deductions lower the taxable income resulting in lowering the federal income tax obligation. 
Student loan interest:

• Taxpayer’s modified adjusted gross income is between $85,000 and $100,000 ($170,000 and $200,000 if filing jointly)
• An eligible student may deduct student loan interest paid during the year on a qualified student loan
• May reduce taxable income up to $2,500

Business deduction for work-related education:

• Eligible self-employed individuals, Armed Forces reservists, certain artists, and certain government officials may be able to deduct the costs of qualifying work-related education as business expenses. Individuals with a disability can deduct impairment expenses related to this education as an itemized deduction.

More information

• IRS Publication 970, Tax Benefits for Education
• Tax benefits for education: Information center
• Compare education credits

Subscribe to IRS Tax Tips

Back to top