The Lowdown on Education Tax Breaks
College is more expensive than ever, but credits and deductions can help you cut thousands off your 2024 tax bill.
Key Takeaways
- The American Opportunity Tax Credit provides a credit of up to $2,500 per student enrolled in the first four years of higher education.
- Up to 40% of the American Opportunity Tax Credit (or $1,000) is refundable if you owe no taxes.
- The Lifetime Learning Credit provides a credit of up to $2,000 for payment of qualifying higher education expenses for any year of higher education, even if the student is not pursuing a degree.
- Parents and students with an Adjusted Gross Income under $90,000 if filing as single or under $185,000 if married filing jointly can deduct up to $2,500 of interest paid on student loans through the end of the 2024 tax year.
The American Opportunity Tax Credit
The familiar Hope Credit has been replaced by the new and improved American Opportunity Credit. For your 2024 taxes, the American Opportunity Tax Credit:
- Can be claimed in amounts up to $2,500 per student, calculated as 100% of the first $2,000 in college costs and 25% of the next $2,000.
- May be used toward required course materials (books, supplies and equipment) as well as tuition and fees.
- May be applied against four years of higher education (instead of just two years under the previous Hope Credit).
What’s more, the new tax credit is available to more taxpayers than the Hope Credit. The full credit may be claimed by people with modified adjusted gross income (MAGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. The credit is gradually reduced at higher income levels. Lower-income taxpayers also benefit because up to 40% of the credit (or $1,000) is refundable, meaning that you can expect a check from the government if you owe no taxes.
The Lifetime Learning Credit
The maximum annual credit is $2,000, calculated as 20% of the first $10,000 in qualifying educational expenses. But there is no limit on the number of years of higher education for which you can claim it. As a result, although the American Opportunity Tax Credit yields a higher tax credit of up to $2,500 per student and is the best bet for most undergraduates, the Lifetime Learning Credit may be particularly helpful in reducing costs for graduate students or students who are taking post-secondary courses but not pursuing a degree.
Beginning in 2021, the income limits for the Lifetime Learning Credit are increased to be in line with those of the American Opportunity Tax Credit. The full credit may be claimed by people with modified adjusted gross income (MAGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly.
Married couples who file separate tax returns cannot claim any of these credits. In addition, you cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.
Most parents will come out ahead with the more generous American Opportunity Credit.
TurboTax Tip:
Interest on eligible Series EE and I bonds and earnings from Coverdell Savings Accounts and 529 Education Savings Plans are not taxable if you use the money to pay for higher education expenses and your income is at qualifying levels.
Additional tax breaks
You can save even more money on the cost of higher education thanks to a few other tax benefits:
- Even if they don’t itemize their deductions, both parents and students can deduct up to $2,500 of interest on qualifying student loans through the end of the 2024 tax year. The deduction is available to single taxpayers with AGI under $80,000 and married taxpayers with AGI under $185,000. If you paid more than $600 in student loan interest you should receive Form 1098-E at tax time.
- In 2024, when you redeem eligible Series EE and I bonds to pay qualified higher education expenses, the interest on those bonds is not taxable but this tax break begins to phase out if parents owning the bonds have AGI above $96,800 for single filers and $145,200 for married couples filing jointly. The interest exclusion from income is not available for taxpayers filing as married filing separately.
- Interest on earnings in other plans you can use to save for college, including Coverdell Savings Accounts and 529 Education Savings Plans, is not taxable if you use the money to pay for higher education expenses. College expenses you pay from either of these plans aren’t eligible for the American Opportunity or Lifetime Learning credits. If the college expenses you pay in a particular year exceed the amount available from one of these plans, you are allowed to claim a credit for the excess amount.
Most education tax credits are taken by parents. But they can be claimed by students who pay their own college expenses, file their own tax returns and are not claimed as dependents on anyone else’s return.
Not sure which credits to take?
If you prepare your taxes with TurboTax, we’ll guide you to the credits and deductions that will give you the biggest tax breaks. Just answer some simple questions and we’ll recommend the right credits for your situation.
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