Are There Special Tax Breaks for Students?

Being a student costs money -- but thankfully, there are some tax benefits involved.

Being a college student is a costly endeavor. The average Class of 2017 graduate, for example, came away with $28,650 in student loans, and the average current borrower spends $393 a month on student loan payments. The good news, however, is that there are a number of tax breaks designed to help ease the burden for students. 

Tax breaks for students come in two forms -- credits and deductions -- and it’s important to understand the difference. A tax credit is a dollar-for-dollar reduction of your personal tax liability. If you qualify for a credit in a given amount, that sum is deducted directly from your tax bill. This means that if you owe the IRS $1,200, but get a $500 tax credit, your tax bill is reduced to $700.

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A tax deduction, meanwhile, allows a portion of your income to be excluded from taxes. That means your associated savings are a function of your tax rate, which is determined by your tax-filing status coupled with the amount of money you earn. For example, if you get a $500 deduction, you don’t get to subtract that amount from your tax liability. Rather, you simply don’t pay taxes on $500 of your earnings. If your tax rate is 24%, that saves you $120. But if your tax rate is 32%, you save $160.

In other words, a $500 tax credit is worth $500 to anyone who claims it. But the actual value of a $500 tax deduction can vary. Tax credits and deductions are claimed when you file your taxes. Any credit or deduction you’re eligible for in 2019 should be claimed on your 2019 tax return, which you’ll actually file in 2020. 

With that out of the way, here are three important student tax breaks you should know about for the 2019 tax year, which you'll file in 2020. 

1. The American opportunity tax credit

The American opportunity tax credit is worth up to $2,500 a year during your first four years of higher education. To qualify, you need to be enrolled in your studies on a half-time basis or more. (Half-time means you're taking six to eight credit hours per semester, whereas full-time means 12 credit hours or more.)

Once eligible, you can claim a credit equal to 100% of the first $2,000 you spend on education expenses like tuition, books, and course materials, plus 25% of the next $2,000 you spend. Expenses like housing and transportation, however, aren’t counted when calculating your credit. 

Now, the above numbers might seem a little confusing, but in a nutshell, let's say you spend $10,000 on college tuition this year. Of that, you can claim your first $2,000 right off the bat, and then 25% of your next $2,000 (which is $500) for a total of $2,500. It doesn't matter that your actual expenses well exceed the $4,000 mark; $2,500 is the most the credit will pay you.

The good news is that the American opportunity tax credit is 40% refundable. Most credits are nonrefundable, which means the most they can do is reduce your tax liability to $0. But depending on your circumstances, the American opportunity tax credit could pay you up to $1,000 in the form of a refund. 

Whether you'll be able to claim the credit, however, will depend on your income level. Many tax credits phase out for higher earners, but if you're enrolled in college and working at the same time, your income is unlikely to be too high for you to qualify. 

You'll qualify for the credit as a single tax filer if your modified adjusted gross income (MAGI) is $80,000 or less. A MAGI between $80,000 and $90,000 will give you a partial credit, and you're ineligible to claim the credit at all as soon as your MAGI exceeds $90,000. 

If you're married and file a joint tax return with your spouse, you'll qualify for the credit if your MAGI is $160,000 or less, and a partial credit if your MAGI falls between $160,000 and $180,000. But you won't be eligible for the American opportunity tax credit once your joint income exceeds $180,000.

2. The lifetime learning credit

Like the American opportunity tax credit, the lifetime learning credit will give you a portion of your education expenses back if you qualify. The credit is worth 20% of the first $10,000 you spend on education costs, which means you can get up to $2,000 back when you file your tax return. 

The lifetime learning credit isn't just for undergrads in their first four years of college, though -- anyone pursuing postsecondary education can qualify, depending on income. Also, the credit is nonrefundable, so while you can use it to reduce an existing tax liability, you won't receive money back from the IRS if that liability falls below $0. 

As is the case for the American opportunity tax credit, living expenses and transportation don't count toward the lifetime learning credit. But tuition, course materials, and books do. 

As far as income goes, you can claim the credit in full if your MAGI is below $58,000 as a single tax filer. The credit starts to phase out if your MAGI falls between $58,000 and $68,000, and you're not eligible for it at all if your MAGI surpasses $68,000. 

If you're a joint tax filer, you can claim the full credit with a MAGI below $116,000. There's a partial credit for MAGIs between $116,000 and $136,000, and you lose the credit altogether once your MAGI exceeds $136,000.

Keep in mind that you can’t claim both the American opportunity tax credit and the lifetime learning credit in the same year. But because the former is worth more, it generally pays to claim it over the latter if you’re eligible for it. 

3. The student loan interest deduction

If you're responsible for paying student loans, you're no doubt aware that a portion of each monthly payment goes toward interest on your loan. The bad news is that that makes your loans more expensive. But the good news is that you may be eligible to deduct up to $2,500 in student loan interest on your tax return each year. 

To qualify for the student loan interest deduction, the loan in question must be in your name. You also can't be claimed as a dependent on someone else's tax return, nor can your tax status be married filing separately. 

Keep in mind that your lender will only send you a tax form summarizing your student loan interest if you pay more than $600 of it in a given year. If your student loan interest for the year totals less than $600, you can still claim the deduction, but you'll need to contact your loan servicer for that information.

As is the case for the credits above, your student loan interest deduction decreases when you reach higher income levels. If you're a single tax filer, you can claim the full deduction with a MAGI below $70,000. A MAGI between $70,000 and $85,000 will give you a partial deduction, but it's off the table once your MAGI exceeds $85,000. 

Joint tax filers, meanwhile, can claim the deduction in full with a MAGI below $140,000. A MAGI between $140,000 and $170,000 will result in a partial deduction, but the deduction goes away with a MAGI above $170,000. 

One additional thing you should know is that most of the time, you need to itemize your tax return to claim any sort of deduction. But assuming you otherwise qualify, you can claim a student loan interest deduction even if you don’t itemize, or just take the standard deduction (which most tax filers do) instead. 

Claim those tax breaks

If you’re paying for college, or are in the process of paying off student loans, it helps to know that tax breaks exist to help ease the burden. That said, not everyone is eligible for the above tax breaks, so if you don't qualify, you’ll need to find other ways to make your education and its associated loans more affordable. That could mean choosing a college that requires lower tuition, or limiting yourself to federal loans, which are typically less expensive to pay back than private loans

Finally, remember that the rules surrounding the aforementioned tax breaks can change from year to year. It may be the case that you’re eligible for a credit or deduction one year, but not the next, or vice versa. Be sure to consult the IRS when you gear up to file your taxes so that you know exactly which credits or deductions to claim.

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