When you use student loan funds to finance your education, if you are eligible, the IRS allows you to claim qualifying expenses that you pay with those funds towards educational tax credits. A tax deduction is also available for the interest payments you make when you start repaying your qualified education loans. Here's more about how student loans and educational expenses can affect your taxes.
The American Opportunity Tax Credit
Students who are pursuing a course of study that'll eventually lead to a degree and are still in their first four years of higher education at the beginning of the tax year may be eligible to claim the American Opportunity Tax Credit.
However, it's not available to:
- Graduate students
- Students who've claimed the credit for more than four tax years already
- Or students with felony drug convictions
To qualify, you must be enrolled for at least one academic period at least half-time each year. The credit covers 100% of the first $2,000 in qualified expenses plus 25% of the next $2,000. Eligible expenditures include:
- tuition payments
- books and supplies
- required fees
That's a maximum annual tax credit of $2,500.
However, after a certain income level, the credit starts phasing out. In 2023, the credit begins decreasing for:
- Single taxpayers with a modified adjusted gross income (MAGI) above $80,000
- Or married taxpayers filing joint returns with a MAGI above $160,000
The credit is not available to those whose income exceeds $90,000 for single filing or $180,000 for married filing jointly.
The Lifetime Learning Credit
Students who have already finished their first four years of post-secondary study or who take an occasional course to improve work skills can qualify for the Lifetime Learning Credit. Although it isn't as robust as the American Opportunity Tax Credit, the credit can be used for:
- 20% of your tuition and fee payments up to $10,000 — a maximum of $2,000
- It doesn't include the cost of books and supplies unless they are required to be purchased through the school
As with the American Opportunity Tax Credit, the IRS allows you to claim the Lifetime Learning Credit even if you use a qualified student loan to pay for your tuition.
For example, if you borrow and then use the money to pay $2,000 for your tuition, your credit will equal $400:
- $2,000 tuition payment x 0.20 (20%) = $400 credit.
If you pay $15,000 in tuition, your credit will equal $2,000 because of the $10,000 limit on qualifying educational expenses.
- $15,000 > $10,000 limit, so you are limited to claiming 20% of $10,000.
- $10,000 x 0.20 (20%) = $2,000 credit.
In 2023, the Lifetime Learning Credit is phases out for single taxpayers with modified adjusted gross income between $80,000 and $90,000 and between $160,000 and $180,000 if married filing jointly.
IRS Form 8863
For any tax year that you claim either of the tax credits above, the IRS requires you to prepare a Form 8863 and submit it with your personal income tax return.
- You use this form to report your eligible school expenses and to calculate the credit.
- In most cases, your school will notify you of your eligible costs for the year before you prepare your income tax return by sending you a Form 1098-T.
Remember, with TurboTax, we’ll ask you simple questions and fill out the right forms for you, based on your answers.
The student loan interest tax deduction
The tax benefits of your student loan don't end with the above credits. A deduction is also available for the interest payments you make when you start repaying your loan.
As of 2023, the deduction is available to the following filers:
- Single filers with MAGIs of $90,000 or less
- Married couples filing jointly with MAGIs of $185,000 or less
The deduction amounts are reduced for the following filers:
- Single filers with adjusted gross incomes between $75,000 and $90,000
- Married couples filing jointly with incomes between $155,000 and $185,000
The amount you can deduct is limited each year. You can only deduct the interest on student loans you actually used to pay school-related expenses, including your room and board.
Even if you used some of the funds for other personal expenses, such as to finance a vacation, the deduction is not entirely lost. You just need to reduce what you claim accordingly to reflect the amounts you actually paid towards school expenses.
Not sure which deductions or credits to take?
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