In the United States, education tax deductions are reductions from taxable income allowed on an individual taxpayer's income tax return under the Internal Revenue Code. Although tax deductions are very similar to education tax credits, and indistinguishable by the vast majority of tax payers, the two forms of educational tax benefit work in a slightly different way.
General
Education tax deductions are claimed by individual income taxpayers for certain qualified education-related expenditures on Form 1040, U.S. Individual Income Tax Return. The amount of the education tax deductions are used to offset the taxpayer's total income, which is used to compute the taxpayer's adjusted gross income and, subsequently, the taxpayer's taxable income. Education tax deductions often have little benefit for taxpayers in very low-income tax brackets or who pay no income tax.
Tuition and Fees Deduction
There are two types of education tax deductions: a student loan interest deduction and the tuition and fees deduction. The tuition and fees deduction is a dollar-for-dollar reduction in the amount of gross income for up to $4,000 of higher education expenses, including tuition, books, boarding and other educational fees. The deduction is on a per taxpayer basis (as opposed to a per student basis) and is phased out and eventually eliminated for high-income taxpayers.
Student Loan Interest Deduction
The second type of education deduction is the student loan interest deduction. This deduction allows the taxpayer to reduce gross income dollar-for-dollar for up to $2,500 in qualified student loan interest. Like the tuition and fees deduction, the student loan interest deduction is on a per taxpayer basis. The deduction is available until student loans are fully repaid, not only when the student is enrolled, although the deduction is phased out for higher-income taxpayers.
Credits
There are several education tax credits available under the Internal Revenue Code. Since these credits operate so similarly to education tax deductions, they are generally discussed simultaneously. While tax deductions reduce the amount of the taxpayer's taxable income, credits directly reduce the amount of the taxpayer's tax liability. Thus, if the taxpayer has a $5,000 tax, a $1,000 credit will reduce the amount of the tax to $4,000. Credits may be either refundable or nonrefundable. A nonrefundable credit may reduce the amount of tax to a minimum of $0. A refundable credit can reduce the amount of tax to a negative value and result in a payment to the taxpayer.
Types
The education tax credits available under the Internal Revenue Code include the Hope credit, the American opportunity credit and the lifetime learning credit. The Hope credit is available for students in the first two years of post-secondary education and has a maximum value of $1,800 per eligible student. The American opportunity credit is available for students in the first four years of post-secondary education and has a maximum value of $2,500 per eligible student. The lifetime learning credit is is available for students in all levels of post-secondary education and has a maximum value of $2,000 per eligible student.
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