Education Tax Savings

With the school year drawing near it is a great time to discuss the various tax savings the government has for post-secondary education.  Here are the various programs:

The American Opportunity  Credit

This has essentially replaced the Hope Credit.

You can receive a credit of up to $2,500 in this program.  A credit is a dollar for dollar reduction in your tax burden.  The credit is computed by taking 100% of the first $2,000 of expenses you have and then the 25% of the next $2,000 of expenses.

Unlike other programs this credit is partially refundable.  Even if you pay no income taxes the government will send you up to $1,000 back.

In order to take advantage of this credit you must be in the first 4 years of your post secondary education and your income must be lower than $80,000 if you are single and $160,000 if you are married.

Lifetime Learning Credit

This credit can be worth up to $2,000.  It is computed by multiplying the first $10,000 of educational expenses by 20%.

This is not a refundable credit meaning you will only receive a credit to the extent that you have a tax liability.

Unlike the American Opportunity Credit which can only be taken in the first 4 years of post-secondary education you can take this credit if you are on the 7 year plan (a la John Belushi in Animal House) or if you are simply taking a class or two. 

The income limits on this credit is $58,000 for single persons and $116,000 for married couples.

Tuition and Fees Deduction

If you choose to bypass the aforementioned credits you can deduct up to $4,000 for educational expenses on your tax return.  A deduction merely lowers the amount of your taxable income and is not a direct reduction of your income tax liability.  In other words, a deduction is not as valuable as a credit.

To claim this deduction your income must be under $65,000 if you are single and $130,000 if you are married.

Who Gets the Credit?

The credits and deductions follow the dependency deduction and it does not matter who is paying for the educational expenses.  This means that if you have a dependant child the tax savings are only available to you and not the child regardless of whether or not loans have been taken or your child is paying their own way. 

What Qualifies as an Educational Expense?

Tuition and fees are qualified as expenses.  The American Opportunity Credit and the Tuition and Fees Deduction has broadened the definition of expense to include supplies and materials needed to enroll in classes.

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