Educational Tax Credits and Deductions You Can Claim for Year 2023

Average higher-education costs for tuition, fees, and room and board have climbed over the last few decades, from $11,411 in 1964 to $26,903 in 2022, according to the U.S. Department of Education’s Institute of Education Sciences via its National Center for Education Statistics If you are enrolled in college, have paid for your own education expenses, or have paid for a dependent’s education expenses, you may be eligible for education tax benefits that can help offset some of the burden of higher-education costs. There are two main types of education tax benefits: tax credits and tax deductions.

A tax credit is the more beneficial of the two because it reduces your tax bill dollar for dollar. This means that if you have a $1,000 credit, your tax bill will be reduced by $1,000.

A tax deduction reduces your taxable income, not your tax bill. Your bill is reduced by only a portion of the deduction. You calculate this amount by multiplying your deduction by your marginal tax rate, which can range from 10% to 37%. Thus, if your tax deduction is $1,000, your tax bill could be reduced by anywhere from $100 to $370.

The two education tax credits available to you are the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC), but you can’t take both credits in the same year for the same student. The one tax deduction available to you is for the amount of student loan interest you have paid in the year.

What is the American opportunity tax credit (AOTC)?

The AOTC is for students in the first four years of higher education. You can claim it if you:

• Have qualified education expenses.
• Were enrolled at least half time in at least one academic period in the tax year.
• Are in your first four years of higher education.
• Haven’t claimed the AOTC or former Hope tax credit for more than four tax years.
• Haven’t had a felony drug conviction.

The AOTC maxes out at $2,500 per student. It is calculated on 100% of your first $2,000 in qualified education expenses and 25% of the next $2,000. The AOTC is partially refundable. Even if you do not owe any taxes, you can receive up to 40% of it ($1,000) as a tax refund.

There are income limits for the AOTC. The credit phases out from a modified adjusted gross income (MAGI) of $80,000 to $90,000 for a single taxpayer, head of household, or qualifying widow(er) ($160,000 to $180,000 for married filing jointly). The credit cannot be claimed if you are a married taxpayer filing separately.

What is the lifetime learning credit (LLC)?

The LLC is for qualified expenses for eligible students enrolled in an eligible educational institution. There is no maximum number of years you can claim the LLC, and it can be used for a wider variety of purposes than the AOTC. These include:

• Undergraduate courses.
• Graduate courses.
• Professional programs.
• Courses aimed at acquiring or improving job skills.

You can claim this credit if:

• You, your dependent, or a third party paid qualified education expenses for higher education.
• You, your dependent, or a third party paid for an eligible student enrolled at an eligible educational institution.
• The eligible student is yourself, your spouse, or a dependent listed on your tax return.

An eligible student is:

• Enrolled or taking courses at an eligible educational institution.
• Taking courses to obtain a degree or improve job skills.
• Enrolled for at least one academic period beginning in the tax year.

The LLC maxes out at $2,000 per return. It is calculated on 20% of the first $10,000 of your qualified education expenses. It is not refundable. If the credit brings your taxes due to zero, there is no amount you can receive as a refund.

There are income limits for the LLC. The credit phases out from a MAGI of $80,000 to $90,000 for a single taxpayer, head of household, or qualifying widow(er) ($160,000 to $180,000 for married filing jointly). It can’t be claimed if you are a married taxpayer filing separately.

AOTC vs. LLC

There are different parameters for each credit. Because you cannot claim both for the same student in a tax year, you should weigh the value of each one based on your specific situation and education expenses. Here is a quick guide to some of the most important similarities and differences.

What is the student loan interest deduction?

The student loan interest deduction allows you to deduct up to $2,500 of student loan interest you have paid in the tax year. You can take the student loan interest deduction even if you do not itemize your taxes because it is considered an adjustment to income rather than an itemized deduction. In 2023 the amount is phased out at a MAGI between $75,000 and $90,000 for a single taxpayer ($155,000 and $185,000 for married filing jointly).

Education tax forms

Form 1098-T, Tuition Statement

You receive a Form 1098-T, Tuition Statement, from an eligible educational institution where you are a student with a reportable transaction during the year. You can use the information from this form to claim education tax credits when you file your taxes.

Form 1098-E, Student Loan Interest Statement

You receive a Form 1098-E, Student Loan Interest Statement, from a financial institution to which you’ve paid $600 or more in student loan interest during the year. You can use this information to claim your student loan interest deduction.

Form 8863, Education Credits

Form 8863, Education Credits, is the form you complete to determine your eligibility for, calculate the amount of, and claim the AOTC or LLC. The refundable portion of your AOTC is calculated on line 8, and the nonrefundable portion of your AOTC or LLC is calculated on line 19.

Form 1040, U.S. Individual Income Tax Return

Form 1040, U.S. Individual Income Tax Return, is your annual income tax return. The refundable portion of your AOTC from line 8 of Form 8863 is entered on line 29 of Form 1040.

Schedule 1, Additional Income and Adjustments to Income

Schedule 1, Additional Income and Adjustments to Income, is an additional schedule to Form 1040 on which you will enter your student loan interest deduction, under “Adjustments to Income” on line 21.

Schedule 3, Additional Credits and Payments

Schedule 3, Additional Credits and Payments, is an additional schedule to Form 1040 on which you will enter the nonrefundable portion of the AOTC or LLC that you calculated on Form 8863. The nonrefundable portion of your education tax credit from line 19 of Form 8863 is entered on line 3 of Schedule 3.

It's not too late to start a 529 plan

A 529 plan, also known as a “qualified tuition program,” is a tax-advantaged savings account that can be used for qualified education expenses. Earnings in a 529 plan grow tax free, and you do not have to pay taxes when you withdraw funds as long as they are used for qualified education expenses. In addition to qualified higher education expenses, you can also use a 529 to fund primary or secondary school at a public, private, or religious school, up to $10,000 per year per beneficiary.

Funds from a 529 plan can not only be used to pay tuition and fees; they can also be used for room and board, books, and supplies required for attendance at an eligible educational institution.

The Internal Revenue Service (IRS) has relaxed the rules for excess funds from 529 plans in recent years. You can now use up to $10,000 (the lifetime limit) to pay off your student loan debt and, as of 2024, you can roll over leftover funds into a Roth individual retirement account (IRA). Because the rules are more flexible than ever before, it’s never too late to start a 529 plan for yourself or a loved one to take advantage of its tax benefits.

New 529 options in 2024

As of Jan. 1, 2024, you can now roll over leftover 529 plan funds into a Roth IRA. There is a $35,000 lifetime limit per beneficiary on the rollovers. The annual contribution limit to an IRA is $7,000 in 2024 ($8,000 if you’re 50 or older). The beneficiary’s earned income for the year must exceed the annual contribution limit. If it doesn’t, the limit is reduced to the amount of earned income.

The 529 plan account must have existed for at least 15 years prior to the rollover into a Roth IRA with the same named beneficiary or taxes and penalties will apply. Rollovers from a 529 plan are not subject to the typical Roth IRA income limits, so you can use this strategy even if you are otherwise ineligible to contribute to a Roth IRA.

Coordinating tax credits for education with tax-free 529 withdrawals

You can claim a tax credit in the same year as you make a tax-free withdrawal from a 529 plan as long as you use the funds for different expenses. As the tax credits do not cover room and board expenses, you can take tax-free 529 withdrawals to pay for room and board while you pay tuition and fees with other funds to take advantage of tax credits.

Additionally, the AOTC is calculated on just the first $4,000 of your education expenses, while the LLC is calculated on the first $10,000. If you have additional education expenses, the remainder can be paid with your tax-free 529 withdrawals.

TIME Stamp: Offset the significant cost of higher education with education tax credits and deductions

Higher education costs are substantial. You can maximize your education tax credits and deductions to help offset the burden of paying for higher education. The AOTC and LLC cannot be claimed for the same person in the same year, but you can coordinate paying different education expenses in the same year as you take withdrawals from your 529 to maximize both the credits and tax-free 529 plan withdrawals.

The student loan interest deduction is helpful once you’re making repayments of your student loans. It can be claimed whether or not you itemize your deductions because it is considered an adjustment to income rather than an itemized deduction. Be sure to keep proper documentation of all your education expenses if you’re taking advantage of these education tax benefits.

Frequently asked questions (FAQs)

What are education credits from the IRS?

Education credits are tax credits offered by the IRS that directly reduce your tax bill on a dollar-for-dollar basis. There are two main education tax credits: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC).

What is the $1,000 tax credit for college students?

Up to $1,000 of the AOTC is refundable. If your tax bill is reduced to zero, you can have 40% of the remaining AOTC refunded to you. The full AOTC is worth $2,500 if you paid $4,000 or more in qualified education expenses, so 40% of the full tax credit is $1,000.

How do I claim education expenses on my taxes?

To claim an education tax credit, you will need to complete Form 8863 and submit it with your Form 1040. The nonrefundable portion of the AOTC or the LLC is entered on line 3 of Schedule 3, and the refundable portion of AOTC is entered on line 29 of Form 1040.

How do education tax benefits affect financial aid?

You report your adjusted gross income (AGI) from Form 1040 on the Free Application for Federal Student Aid (FAFSA) when applying for need-based financial aid. The FAFSA uses tax information from two years prior to the upcoming school year. For example, the 2024-2025 FAFSA asks for 2022 tax information. Education tax credits are included on your tax return after AGI, so they do not impact it for FAFSA reporting.

The student loan interest deduction will impact your AGI because it is included in adjustments to income on line 10 of Form 1040 before AGI is calculated on line 11. However, student loan repayments are not typically required until six months after you have graduated or are no longer enrolled at least half time, so the deduction should not be an issue for financial aid while you’re still in school.