Reducing the Cost of Higher Education — Ideas to Manage Your Tax Breaks

Who Qualifies:

Typically you, your spouse, or a dependent that can be claimed as an exemption on your individual tax return

Qualified Expenses:

Tuition and fees, course related books, supplies and equipment

Common Tax Benefits:

1. American Opportunity Credit
   • Amount of Credit: $2,500 per eligible student at an eligible institution (100% of initial $2,000 and 25% of the next $2,000)
   • Frequency: Available for the first four years of post-secondary education
   • Comments: In 2025, 40% of this credit is a refundable credit. This means you can receive up to $1,000 even if you owe no federal income taxes.
   • Phaseout: $160,000 – 180,000 married; $80,000 – 90,000 single
2. Lifetime Learning Credit
   • Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 of eligible expenses)
   • Frequency: No limit on number of years you can claim the credit
   • Phaseout: $160,000 – 180,000 married; $80,000 – 90,000 single
3. Student Loan Interest Deduction
   • Amount of Deduction: Up to $2,500 of eligible student loan interest expense
   • Frequency: Per taxpayer per year
   • Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions.
   • Phaseout: $170,000 – 200,000 married; $85,000 – 100,000 single

Tips to Maximize your Tax Benefit

• The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple eligible students, the American Opportunity may be a better choice.
• Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits.
• You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits.
• Gifts, bequests, or inheritances do not reduce your eligible expenses.
• Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return.
• Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts, you could subject yourself to a 10% tax penalty.