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10 February, 2023

Education Tax Credits for Higher Education

How many of us have come up against the soaring rates of college tuition as we strive to match our academic skills with a budget friendly four-year university. Whether it’s you or your child, managing to pay for higher education is an ambitious endeavor, made even more challenging due to the staggering yearly increases in college tuition. 

The average cost of tuition and fees for the 2021-22 academic year at a private nonprofit four-year college was $38,070. The average cost for a student living on campus at a public four-year in-state institution is $25,707 per year, or $102,828 over four years. 

In Utah, the average annual in-state, four-year college tuition was $13,544 for the 2020-2021 academic year. Any way you look at it, going to college is becoming a privilege for the few people who can afford it. 

But there is good news! You may be able to claim tax credits and deductions for higher education. This means you could get back some of the money you spent for college expenses by reducing your tax liability.

Education Benefits for Your Taxes 

You could cash in on significant tax savings if you file your taxes as married filing jointly or single. The Internal Revenue Service (IRS) doesn’t permit you to claim education tax credits if you are married and file separately. 

However, you might qualify for education tax benefits if you have a child in college or if you are in college. This could offset a portion of the out-of-pocket education expenses you’re currently paying for. 

You might also be eligible for tax deductions, which could lessen the amount that is considered taxable income. What’s more, you could also be allowed to claim certain tax credits, and that can decrease the amount of tax that you owe.

3 Ways You Can Lower Your Tax Liability with Higher Education

American Opportunity Tax Credit 

Do you think you’re paying too much for you or your child’s college education?  How about getting some of your money back with the help of the American Opportunity Tax Credit (AOTC). This credit could be as high as $2,500 per student for 2022. The amount of your credit through the AOTC will vary based on your income, as well as the cost of higher education, and the number of eligible students in a family.

Here is how the AOTC works. If your modified adjusted gross income (MAGI) is $80,000 or less — $160,000 or less for joint filers – you can typically claim the credit for the qualified expenses of an eligible student. This credit is decreased if your MAGI surpasses that amount. If your MAGI is more than $90,000 — $180,000 for joint filers – you are not able to claim this credit. 

The AOTC is calculated in two parts and is equal to: 

  • 100 percent of the first $2,000 of eligible expenses 
  • 25 percent of the next $2,000 in eligible expenses 

In order to be eligible for the AOTC, the student must: 

1)     Be you, your spouse, or your dependent that you listed on your tax returns; 

2)     Have qualified education expenses at an eligible educational institution; 

3)     Not have completed the first four years of higher education at the beginning of the tax year; 

4)     Be enrolled at least half time for, at minimum, one academic period beginning in the new tax year; 

5)     Be pursuing a degree or other recognized educational credential; 

6)     Not have a felony drug conviction at the end of the tax year; 

7)     Not have claimed the AOTC or the former Hope credit for more than four tax years; 

Lifetime Learning Tax Credit 

The Lifetime Learning Tax Credit covers up to $2,000 of undergraduate and graduate school costs. The rules for the Lifetime Learning Tax Credit are unchanged from previous years. This credit is: 

  • 20 percent of up to $10,000 of qualified education expenses 
  • The maximum credit is $2,000 prior to any phase-outs 

Rules of Eligibility and Qualified Expenses for the Lifetime Learning Tax Credit 

The Lifetime Learning Tax Credit can assist you in covering undergraduate expenses for a student who isn’t eligible for the AOTC because they are carrying a limited course load or already have four years of college credit. Also, the Lifetime Learning Tax Credit can be used to pay for the cost of graduate school and for courses taken to maintain or improve job skills. 

You will be able to claim the Lifetime Learning Tax Credit for qualified education expenses that you pay for a dependent child, in addition to yourself or your spouse. 

  • The maximum amount of covered expenses is $10,000 no matter how many students you have;
  • This translates into a $2,000 maximum credit ($10,000 X 20 percent);

Qualified expenses include mandatory enrollment fees and tuition at an eligible institution. Courses materials and books also count, however, only if you are required to buy them directly from the school. And other expenses, like room and board and optional fees, don’t qualify. 

Eligible institutions include: 

  • Colleges 
  • Universities 
  • Post-secondary vocational schools 
  • Other post-secondary educational institutions 

Income Phase-out Rule 

Similar to the AOTC, the Lifetime Learning Tax Credit is phased out if your MAGI surpasses certain levels. 

  •   For 2022, the MAGI phase-out range for unmarried individuals is $80,000 to $90,000;
  •   The MAGI phase-out range for married couples filing jointly is $160,000 to $180,000;
  •   No matter what your income is, you’re not eligible if you use married filing separately status;

Student Loan Interest Tax Deduction 

You might be able to receive a tax deduction of as much as $2,500 for student loan interest that you have paid for yourself, a spouse, or a child based on your income and the amount of interest paid. 

For 2022, the total amount of this deduction is available to taxpayers with a MAGI of less than $75,000, or $150,000 for married taxpayers filing jointly. Those of you with a MAGI lower than $90,000, or $180,000 for married taxpayers filing jointly may be eligible for a reduced deduction.

Look to Drilldown Solution for Expert Tax Planning Services for Your Small Business 

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on the needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring that your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business. 


Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel, CPA is President of DrillDown Solution and a graduate of Brigham Young University. His clients benefit from over 40 years of experience in maximizing profits, minimizing taxes and putting them in the best financial position possible.