Today, most college graduates leave school with student loan debt. Tax credits and deductions in 2019 can provide some relief for students, families with children in school, as well as recent graduates.

What is the difference between a tax credit and a tax deduction? A tax credit reduces the amount of income tax you owe the IRS. A tax deduction reduces the amount of your income that is taxable by the IRS. There are restrictions on the education tax credits and deductions described below.

The American Opportunity Tax Credit (AOTC) allows individuals with incomes of $80,000.00 or less of modified adjusted gross income (MAGI) and $160,000.00 for married couples filing jointly to qualify for the most valuable of education tax credits. The credit phases out and then disappears completely with those with MAGI above $90,000.00 for individuals and $180,000.00 for married couples filing jointly. In addition, only drug felony free students who are taking classes on at least a half- time basis in a degree or certificate program meet this tax credit’s requirements.

The student must be enrolled in the first four years of postsecondary education. If four years of college have already been completed by a student (even if the credit was never used for those four years and a degree has not been achieved), that student is no longer eligible for this credit. If you meet these stringent requirements, you can qualify for 100% of the first $2,000.00 of qualifying education expenses and 25% of the next $2,000.00 in tax credits. If you pay $4,000.00 or more in qualifying education expenses, you can receive $2,500.00 in tax credits!

If your tax liability is low and you do not owe the IRS any money, you can get up to forty percent of the tax credit in cash refunded to you– which could mean $1,000.00 in your bank account.

Complete IRS Form 8863 and attach it to your Form 1040 or 1040A to claim the AOTC.

The Tuition and Fees Deduction. You can deduct up to $4,000.00 on your tax return to reduce your taxable income. You cannot get any of the money refunded if your tax liability is zero. The maximum benefit depends on your tax bracket and it can be taken even if you do not itemize on your tax form. You must only use the amount you paid during the calendar year for which you claim any of these tax breaks.

What about tax breaks for student loan borrowers? The Student Loan Interest Deduction allows you to deduct the actual amount of interest up to $2,500.00 on qualified student loans. You can deduct this whether you itemize on your return or not. Your loan must have been used for the purpose of paying for qualified higher education expenses within a reasonable amount of time after the loan origination. The same income thresholds as the Tuition and Fees Deduction apply for the Student Loan Interest Deduction.

Scholarships, fellowship grants, and other grants may be, all or in part, tax free. Go to the IRS website and refer to Topic 421 where you will find specific information about what is taxable or tax free, how to report, and any estimated tax payments due. Remember these tax breaks are there to help make higher education a little less expensive!

Take advantage of all credits and deductions that you or your dependents qualify for this year.

Don’t qualify for these deductions or looking for more educational aid? Apply here for a FACT Scholarship for all types of higher education!  There are no deadlines and applications are reviewed quarterly.

Additional Resources:
IRS Education Credits

On the IRS website, you can find further information under the topics listed below: Publication 970, Tax Benefits for Education Form 8863, Education Credits Education & Work Related Expenses Scholarships