3 Student Loan Tax Credits and Deductions

By
Kat Tretina
,
November 20, 2018

Going to school and repaying your student loans can be expensive. But did you know that there are ways you can get money back? It might sound too good to be true, but there are education tax credits and deductions that can make higher education more affordable.


Here are three credits and deductions you may qualify to receive.

1. American Opportunity Tax Credit (AOTC)

If you’re still in school, you might be able to qualify for the AOTC. The AOTC is a tax credit, meaning it’s subtracted from your tax liability rather than your taxable income. For example, if you have find out that you owe the IRS $1,000 at tax time, a tax credit can help reduce that amount.


With the AOTC, you can get up to $2,500 per year. Even better, the credit is refundable. That means if your tax bill is smaller than the tax credit, the remaining balance is refunded to you. If you had a $1,000 tax bill and qualified for the full AOTC credit, you’d get $1,500 back.

Eligibility

To be eligible for AOTC, you must meet the following criteria:


  • You must be pursuing a degree or education credential
  • You must be enrolled at least half-time
  • You must not have completed four years of education yet
  • You must not have claimed the credit for more than four years
  • You must not have a felony drug conviction
  • To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for a married couple filing jointly).

How to claim

Each year, your school will send you Form 1098-T, which shows what you paid toward tuition. Using that information, you’ll complete Form 8863 and attach it to your 1040, your personal tax return.

2. Lifetime Learning Credit (LLC)

Unlike the AOTC, which can only be claimed for four years of undergraduate expenses, you can claim the Lifetime Learning Credit (LLC) for undergraduate, graduate, and professional degree courses. There is no limit on how long you can claim the LLC, and it’s worth up to $2,000 per year.

Eligibility

To qualify for the LLC:


  • You must be enrolled at an eligible higher education institution
  • You must be working toward a degree or other credential
  • You must be enrolled for at least one academic period beginning in the tax year
  • Your MAGI must be $66,000 or less if single or $132,000 or less if married to claim the full credit

How to claim

Like the AOTC, your school will send you a form detailing how much you paid in tuition. You’ll use that information to complete Form 8863, which you have to attach to your personal tax return.

3. Student Loan Interest Deduction

If you have already graduated and are repaying your student loans, you’re not eligible for AOTC or the LLC. However, you can still qualify for a tax deduction thanks to the interest you’ve paid on your loans.


Unlike credits, which reduce your tax liability, deductions affect your taxable income. With the student loan interest deduction, you can deduct up to $2,500 that you paid in interest on your loans from your taxes.


Best of all, both federal and private student loans qualify for the deduction. Even if you refinance your student loans, you are still eligible for it, so you get the benefits of refinancing—such as a lower interest rate or smaller monthly payment—without sacrificing the deduction.  


And it’s an above-the-line deduction, which means you can claim it even if you don’t itemize your deductions.

Eligibility

You can claim the deduction if you meet the following criteria:

  • You paid interest on a qualified student loan within the past tax year
  • You’re legally obligated to pay the student loan
  • Your filing status is not “married filing separately”
  • You can’t be claimed as a dependent on someone else’s tax return
  • Your MAGI is less than the specified amount, which can change annually

How to claim

Your student loan servicer will send you Form 1098-E, which shows how much interest you paid on your student loans. You’ll enter this information on the deduction section of your personal tax return.

Claiming all of the credits and deductions you deserve

Claiming all of the credits and deductions you qualify for is a smart way to reduce your tax bill and save money. Since you’re working hard to finish your degree or to pay off your loans, it makes sense to claim every dollar to which you’re entitled.


Make sure you hold on to all of the required forms so you can claim the tax credits or deductions. By staying organized and filing your return on time, you can help offset your education expenses or student loan repayment costs.

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