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A quick lesson on education credits & tuition deduction

During this presidential primary season, the cost of higher education has been a major campaign issue, especially on the Democratic side.

A study break wherever possible_University Life 159 by Francisco Osorio via FlickrTaking a study break. "University Life 159" by Francisco Osorio via Flickr.

Sen. Bernie Sanders is proposing free college for all. Former Secretary of State Hillary Clinton has a plan for debt-free college. Business Insider has a side-by-side comparison of Sanders' College for All Act and Clinton's New College Compact.

But until Clinton or Sanders is elected, students and their families will have to rely on existing educational tax breaks.

Comparing current education tax benefits: The most popular are the American Opportunity and Lifetime Learning tax credits, and the above-the-line Tuition and Fees deduction. Each provides tax savings every year to millions of taxpayers.

Credits generally are better than deductions since they offer dollar-for-dollar savings on what you owe the U.S. Treasury. Deductions, on the other hand, help reduce your income and that typically means a smaller tax bill.

But tax generalities aside, taxes are unique to each filer's personal circumstances. So when it comes to education tax breaks, examine each in relation to your personal tax situation to see (a) if you qualify and (b) which is better for your taxes.

The Internal Revenue Service' side-by-side comparison of the popular education tax breaks can help. 

Education Credits and Tuition Deduction Comparison
Tax Year 2015

Criteria American
Opportunity (AOTC)
Lifetime Learning (LLC) Tuition and
Fees Deduction
 Maximum credit or benefit  Up to $2,500 credit per eligible student  Up to $2,000 credit per return  Up to $4,000 taxable income reduction per return
 Refundable or nonrefundable  40% of credit   Not refundable  Does not apply  
 Limit on modified adjusted gross income (MAGI)* for married filing jointly  $180,000  $130,000   $160,000

 Limit on MAGI* for single, head of household, or qualifying widow(er)

 $90,000  $65,000  $80,000
 Can you file married filing separately? No 
 Dependent status  Cannot claim credit if you are claimed as a dependent on someone else's return
 Must you or your spouse be a U.S. Citizen or Resident Alien?  Yes, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status)
 Number of years of post-secondary education available  Only if student hasn't completed 4 years of post-secondary education before 2015  All years of post-secondary education and for courses to acquire or improve job skills  All years of post-secondary education 
 Number of tax years credit available  4 tax years per eligible student including any years former Hope credit claimed  Unlimited  Unlimited 
 Type of program required  Student must be pursuing a degree or other recognized education credential   Student does not need to be pursuing a degree or other recognized education credential  Student must be enrolled at eligible educational institution for one or more courses
 Number of courses  Student must have been enrolled at least half time for at least one academic period beginning in 2015  Available for one or more courses   Available for one or more courses at eligible educational institution 
 Felony drug conviction  No felony drug convictions as of the end of the tax year  Does not apply   Does not apply
 Qualified expenses  Tuition, required enrollment fees and course materials needed for course of study   Tuition and fees required for enrollment or attendance   Tuition and fees required for enrollment or attendance
 For whom can you claim the benefit?
  • You
  • Your spouse
  • Student you claim as a dependent on your return 
  • You
  • Your spouse
  • Student you claim as a dependent on your return
  • You
  • Your spouse
  • Student you claim as a dependent on your return 
 Who must pay the qualified expenses?
  • You or your spouse
  • Student
  • Third party**
  • You or your spouse
  • Student
  • Third party**
  • You or your spouse
 Payments for academic periods

 Made in 2015 for academic periods beginning in 2015 or the first 3 months of 2016

 Do I need to claim the credit or deduction on a schedule or form?

 Yes, Form 8863, Education Credits

 Form 8863 Instructions

 Yes, Form 8863, Education Credits

 Form 8863 Instructions

 Yes, Form 8917, Tuition and Fees Deduction

*MAGI for most people is the amount of adjusted gross income (AGI) shown on your tax return. In some cases, some income exclusions and deductions are added back to arrive at MAGI.
**Third Party-Qualified education expenses paid by a third party for you or your student claimed as a dependent on your return are considered paid by you for the American Opportunity tax credit (AOTC) and Lifetime Learning credit (LLC). Payments by third parties include amounts paid by relatives or friends.

More in tax tips:  A couple of Daily Tax Tips last week focused on educational tax breaks. They have a bit more on the popular AOTC and LLC, as well as other educational tax breaks.

The three other tips posted the week of March 21-25 examined required retirement account distributions and a couple of itemized tax deductions. They are:

  1. Check out the many education tax breaks (Monday, March 21, 2016)
  2. An education tax credit primer (Tuesday, March 22, 2016)
  3. Older folks face April 1 RMD deadline (Wednesday, March 23, 2016)
  4. Deducting state and local taxes (Thursday, March 24, 2016)
  5. Maximizing medical deductions (Friday, March 25, 2016)

If you're a student or have one in your family, I hope the current education tax breaks can help ease some of the high costs of higher education.

For folks whose school days are over, here's hoping that this week's or previous tax tips can help you cut your current tax bill.

In addition to these end-of-week tax tip roundups, you can find all of the 2016 tax tips posted so far on their special January, February and March blog pages. The tips will continue, highlighted each weekday in the upper right corner of the ol' blog, through the April 18 filing deadline.


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