6 things students should know about education tax credits

This is the last year to take advantage of the tuition and fees deduction
By: | April 5, 2021
(AdobeStock/NaMaKuKi)(AdobeStock/NaMaKuKi)

Even though the tax deadline was moved out a month to May 17, it’s a good time to get paperwork in order to see if there are tax savings to be had for the 2020 tax season. In fact, this is the last year to take advantage of the tuition and fees deduction.

The federal government offers several tax deductions and credits that can help reduce the cost of education. For most students in their first four years of higher education, the American opportunity credit is the best deduction.

The lifetime learning credit is generally the best afterward and is increasing the maximum limit allowed. Since you can’t get more than one tax benefit off of the same education expense, plan carefully what money comes from which account and which benefits you can claim.

Also, you’ll need to understand modified adjusted gross income, as it’s often the qualifier for education tax benefits. It’s just the adjusted gross income on your tax return plus certain tax benefits added back like the student loan interest deduction.


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Here’s what your students need to know about specific benefits:

  • How scholarships are taxed: Tuition and fees, books supplies, and equipment are untaxed while attending an eligible higher education institution on a path towards completing a degree. However, scholarship money used for room and board, laundry service, etc., can be taxed.
  • Tuition and fees deduction is expiring: 2020 is the last federal tax year the tuition and fees deduction can be claimed. It reduces taxable income by up to $4,000 and Modified Adjusted Gross Income cannot exceed $80,000 as a single filer. However, this deduction is being replaced with higher income limits for the lifetime learning credit tax credit.
  • Student loan interest deduction: The federal government allows up to $2,500 for tax year 2020 of your federal and/or private student loan interest charges to be deducted from your taxable income. The Modified Adjusted Gross Income cannot exceed $70,000 as a single filer. For those with income between $70,000 and $85,000, a portion of the deduction is available. For instance, someone with a modified adjusted gross income. To qualify, the loan must be in your name.
  • American opportunity credit: The credit gives back up to $2,500 per year for the first four years of higher education. The student must be attending a higher education instead institution for at least half-time status. The student also must be pursuing a degree or eligible credential. One tax credit per student per year and the Modified Adjusted Gross Income cannot exceed $90,000 as a single filer.
  • Lifetime learning credit: The credit is applied against taxes for an unlimited number of years for up to $2,000 per year (20% of $10,000). Modified adjusted gross income cannot exceed $69,000 as a single filer and the credit can be claimed by the person paying for higher education expenses, regardless of whether the student is themselves, the student, or their spouse but only one credit can be claimed per tax return.
  • 529 college savings: These plans grow tax-free as long as funds are used for approved higher education expenses, which can include room and board in addition to tuition and fees, books, equipment, and supplies. K-12 tuition or money withdrawing because a student received a scholarship can also be withdrawn without a 10 percent tax penalty.

No matter what you do, read the details carefully when you decide on deductions and credits. Tax rules can change, so refer to IRS publication 970 before deciding what deduction or credit to use.

Reyna Gobel is contributing editor for CollegeFinance.com.