Student loan interest payments are one of the most important tax deductions you can take.
If you are a current college student or recent graduate, you should claim any amount over $600 paid on the interest of your student loans. This helps to balance your budget into next year so you can pay your loans down further.
Looking into additional tax credits or deductions can help you continue to pay down your student loans. If you are a parent and have at least one dependent child attending a college, university, or trade school, you can file for a tax credit to help you manage the financial support of your child.
As of 2019, there are two college tax credits offered by the Internal Revenue Service (IRS) that you can qualify for. This change stems from the Tax Cuts and Jobs Act (TCJA) of 2017 and the Bipartisan Budget Act of 2018. The latter extended the tuition and fees deductions in both college tax credits.
Current law states that you cannot claim both tax credits when you file your taxes, but if you qualify for one college tax credit, you can continue to claim your student loan deduction too. This involves Form 8863, which helps you calculate eligible school expenses.
The Two College Tax Credits Available to Students or Their Parents
Due to the recent changes in tax law, there are two college tax credits you can claim as a current college student or recent graduate paying down student loans.
American Opportunity Tax Credit (AOTC)
This was formerly called the Hope Scholarship Tax Credit. Changes to tax law have expanded this form of tax assistance, allowing more people to file for more money. In 2009, the well-known Hope Scholarship Tax Credit was expanded by Congress into the AOTC, providing a more general college tax credit.
The AOTC applies only during the first four years of postsecondary education at a college or university. Graduate school, certificate programs, and professional school do not count for the AOTC. Students must be currently enrolled and cannot have graduated in the previous tax year.
Eligible students can claim up to $2,500 per year they are in school (up to four years). For example, if you are a parent to three qualifying dependent undergraduate students, you can claim up to $7,500 as a college tax credit to ease your financial burden.
There is a specific breakdown of how the IRS calculates this money:
- You can claim up to 100% of the first $2,000 spent on your education that year.
- You can claim up to 25% of the second $2,000 spent on your education that year.
While this amounts to as much as $2,500 in claimable tax credits, only $4,000 of your education spending is considered a tax write off. The first $2,000 is a general tax credit, while only a quarter of the second $2,000 counts as a college tax credit.
Money claimed as a tax credit must go directly toward specific educational expenses, including:
- Tuition and fees
- Books and supplies
- Equipment (e.g., computer)
- Required course materials
The money you spend on room and board, transportation, and other indirectly related educational expenses does not count for the AOTC. However, 40% of the AOTC is refundable, so if you don’t owe anything in a given tax year, you could receive up to $1,000 as a tax refund when you meet filing requirements. You must be an enrolled student at a college, university, or professional school at least half time, depending on how the school measures enrollment hours.
There are household limits, which can change how you claim the AOTC.
- If you are a single adult and not a dependent, you must make $80,000 or less per year to use the AOTC college tax credit. The credit completely phases out at $90,000 or more per year.
- If you are married and filing jointly, together you must make $160,000 or less per year. This credit phases out after you reach $180,000 per year.
- You must be an undergraduate student at the time you paid for educational expenses.
Lifetime Learning Credit (LLC)
If you do not qualify for the AOTC, you may qualify for the LLC; however, if you qualify for both, you can only choose one of these college tax credits. More people qualify for the LLC, so it may work better for your circumstances.
The AOTC is most often claimed by parents with dependent college students, while the LLC is more often claimed by independent students, especially those furthering their higher education with certifications, doctoral studies, or other post-baccalaureate forms of education.
Those qualifying for the LLC include:
- Undergraduate students past their fourth year of education
- Graduate students
- Professional students
- Postgraduate career training
Anyone attending postsecondary education of some kind can use the LLC to improve their taxes. You cannot claim as much as the AOTC, but you can still claim up to $2,000 per year, per eligible student. There is no minimum enrollment requirement, so you can be less than half time at a postsecondary school and still take this college tax credit.
The LLC is calculated as 20% of the first $10,000 you spend directly on your education, like tuition or books. Like the AOTC, you can only claim direct educational expenses. Room and board, transportation, and other expenses do not count.
Also, like the AOTC, there are income limits for tax filers.
- For a married couple filing together, modified adjusted gross income (MAGI) is $110,000 or less. It phases out at $130,000 or more.
- For a single tax filer (head of household, qualified widower, or independent single individual), the MAGI is $55,000. The tax credit is eliminated at $65,000 or more.
- If you are not claimed as someone else’s dependent on their taxes, you can claim the LLC yourself.
Unlike the AOTC, you cannot get money back from the LLC if you don’t owe anything in taxes. Still, applying this college tax credit can benefit you in the long run.
Exclusions and Income From College Tax Credits Might Change Your Qualifications
Although you cannot claim both the AOTC and the LLC for one person, you may have sufficiently complex taxes that you can claim both college tax credits for different individuals. For example, if you have a dependent child in a four-year undergraduate degree program, you can claim the AOTC on your taxes for them. At the same time, if you are a returning student at a professional or graduate school, you can likely claim the LLC for yourself.
You also cannot claim both credits if either of these is true:
- You are married
- You and your spouse file separate tax returns
Modified adjusted gross income (MAGI) is calculated through several sources of income, including:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Exclusion of income by bona fide residents of Puerto Rico or American Samoa
The MAGI is used to determine whether you qualify for the AOTC or LLC. Many people do, so if you can estimate your MAGI and find that you fit into the brackets as discussed above, claim these credits to make repaying your student loans and managing your personal finances simpler.
When you claim a college tax credit like the AOTC or LLC, you reduce your tax burden dollar for dollar of the amount you qualify for. If you did not spend much money on your education, for example, but you can claim $800 toward your undergraduate education, you can use either the AOTC or LLC to lower how much you must pay in taxes by $800. With the AOTC, if the amount you owe is less than the credit amount, you can get the remainder as a tax refund and use it to pay down your student loans.
If you qualify for either of these tax credits, it is important to claim them. Thanks to the Protecting Americans Against Tax Hikes (PATH) Act of 2015, the AOTC is a permanent college tax credit. The LLC may be subject to change or elimination, but it is a good balance to the AOTC.
Ultimately, both dependent students and their parents should claim as much financial help as possible, from scholarships to private student loans to tax credits and deductions. Parents who took out a parent PLUS loan or a private loan for their child can start claiming monthly interest payments on their taxes. Independent students who are beginning to pay private student loans or some types of federal loans can also deduct what they pay in interest on their taxes at the beginning of the new tax year.