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Education Tax Benefits

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This section describes several tax benefits for educational expenses, including the Hope Scholarship and Lifetime Learning tax credits, the Tuition and Fees Deduction, the Student Loan Interest Deduction, and employer education assistance.

Tax Benefits for Education

The education tax benefits include:

  • American Opportunity Tax Credit
    The American Opportunity Tax Credit provides a federal income tax credit of up to $2,500 (40% refundable) per student based on the first $4,000 in postsecondary tuition, fees and course materials paid by the taxpayer during the tax year. The American Opportunity tax credit is 100% of the first $2,000 and 25% of the second $2,000. The tax credit is limited to the first four years of postsecondary education. The American Opportunity Tax Credit (AOTC) is also known as the Hope Scholarship Tax Credit. The AOTC improvements to the Hope Scholarship will expire at the end of 2017.
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  • Lifetime Learning Tax Credit
    The Lifetime Learning provides a federal income tax credit of up to $2,000 per taxpayer based on the first $10,000 in postsecondary tuition and fees paid by the taxpayer during the tax year. The Lifetime learning tax credit is 20% of the first $10,000. The tax credit may be received for an unlimited number of years.

  • Student Loan Interest Deduction
    Borrowers of federal and private education loans may deduct up to $2,500 in interest as an above-the-line exclusion from income. This deduction may be taken even if the taxpayer does not itemize.

  • Employer Tuition Assistance
    Your employer may provide you with up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year. The benefits must have been paid for tuition, fees, books, supplies, and equipment. Travel, lodging and meals are not included. Courses involving sports, games or hobbies are not included, unless they are required as part of a degree program or are related to the business of your employer. (Payments above $5,250 may also be tax-free, if they represent a working condition fringe benefit. This means that if you had paid for the expenses, you would have been able to deduct them as an employee business expense.)

Comparison Chart

Comparison of Education Tax Benefits
Tax Benefit Maximum Benefit Qualified Expenses Income
American
Opportunity/
Hope
Scholarship
Tax Credit
$2,500 tax credit per student
100% of first $2,000
25% of second $2,000

(Tax credit is 40% refundable, not subject to AMT)

Tuition, fees and course materials (textbooks) $90,000 (single)
$180,000 (joint)
Lifetime Learning
Tax Credit
$2,000 tax credit
20% of first $10,000
Tuition and fees $50,000 to $60,000 (single)
$100,000 to $120,000 (joint)
Tuition and Fees
Deduction
$4,000 exclusion from income
Reduced to $2,000 in income phaseout band
Tuition and fees $65,000 to $80,000 (single)
$130,000 to $160,000 (joint)
Student Loan Interest
Deduction
$2,500 exclusion from income Student loan interest $60,000 to $75,000 (single)
$120,000 to $150,000 (joint)
Education Bond Program Exclusion from income of interest on Series EE bonds issued on or after January 1, 1990 and all Series I bonds. Tuition and fees, or rollover into a 529 plan $70,100 to $85,100 (single)
$105,100 to $135,100 (joint)
Employer Tuition Assistance $5,250 exclusion from income per student Tuition, fees, books, supplies, equipment None
Scholarships Exclusion from income of amounts spent on qualified expenses if the student is a degree candidate and the scholarship is not payment for services. The full amount is exempt from FICA whether or not the student is a degree candidate. Tuition, fees, required course-related materials (books, supplies, equipment) None
529 College Savings Plans Earnings are tax-deferred. Qualified distributions are excluded from income. The earnings portion of a non-qualified distribution is taxed at the beneficiary's rate and subjected to a 10% tax penalty. Tuition, fees, books, supplies and equipment, expenses for special needs services. Room and board if enrolled at least half-time. None

Income phaseouts are the 2010 phaseouts.

Additional Information

Other related programs, such as section 529 plans and Coverdell Education Savings Accounts, can be found in the Saving for College section.

The page concerning Education Tax Benefit Coordination is also helpful when you're trying to maximize your benefits from the various education tax benefits.

Additional information on these education tax benefits can be found in IRS Publication 970, Tax Benefits for Education (PDF). See also IRS Form 8863 for more information on the Hope Scholarship and Lifetime Learning tax credits. Colleges use IRS Form 1098-T (instructions) to report qualified tuition and fees paid to the taxpayer by January 31. The information on IRS Form 1098-T helps you complete IRS Form 8863.

The IRS also publishes frequently asked questions about the Hope Scholarship/American Opportunity tax credit.

 

 
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