Don’t Miss Out on Student Loan Tax Credits
March 3, 2014




We are just a few weeks shy of the dreaded annual income tax filing date but, the good news is, this is the one time each year that your student loans and educational costs can prove helpful. There are two types of tax incentives available to help you deal with your debts. Today we’ll look at what’s available, which is preferable and how to take advantage.

Tax day is April 15, 2014

It’s tax time – find out how to get the best results for school expenses

Tax Credits Versus Tax Deductions

Given the choice, tax credits are usually always preferable to deductions. Here’s why: a credit lowers the tax you owe dollar for dollar. For example, if you owe $5,000 in taxes and have a $2,500 tax credit, the taxes you owe will be reduced to $2,500. If you’ve had $3,000 in Federal taxes withheld from your wages, you’ll get a $500 tax refund. By contrast, tax deductions lower your taxable income before the tax itself is calculated.

For example, if your taxable income is $25,000 and you have a $2,500 tax deduction, it lowers your taxable income to $22,500. If your tax rate is 15%, before the deduction was applied, you would owe $3,750 in taxes. After the deduction, your tax owed drops to $3,375. That’s only a $375 net effect from the deduction. You can see easily that a tax credit is a much better deal if they are the same amount. But if a deduction is greater dollar-wise than a credit, it will require further analysis before you choose which you use.

Using the American Opportunity Credit

For 2014, this maxes at $2,500 and credits back the cost of education (so long as they weren’t paid using student loans). This credit isn’t available to singles earning more than $90,000 or couples earning more than $180,000. Married filing separate status makes you ineligible. 40% of the credit is refundable. What this means is that if your credit causes a refund, no more than $1,000 of it will be given back to you.

Typically, parents are the ones to use the AOC. This credit can be used for each kid that’s in school. If you’re an adult paying for your own college, you can also use it. It’s only available for the first four years of college, so use it while you can. The student must be attending at least half-time to be eligible, pursuing a degree program and eligible expenses include tuition, fees and books.

Using the Lifetime Learning Credit

This credit is very similar to the American Opportunity credit except that it maxes at $2,000 per student per year and has a few other caveats. You cannot use the two credits in the same year. You can use one credit on one student and the other on another, but not both on one learner. This credit can be used as long as the student is in school (unlike the four year cap on the AOC). The income cap is lower at $63,000 per single filer and $127,000 for joint filers.

You do not have to be pursuing a degree to use this credit and, of interest, if you’ve had a felony drug conviction, you can’t use the AOC, but can use the LLC. Married filing separate status makes you ineligible. You cannot take either credit if you are a dependent on someone else’s taxes. If Mom and Dad still claim you, they get the credit rather than you. You don’t have to be in school half-time, you can use it even on individual courses. Also, it’s a nonrefundable credit meaning that any excess after it wipes out your tax obligations will not be refunded to you.

Using the Tuition and Fees Deduction

As with the two credits, you can only take this one if you file single, head of household or married filing jointly or, if someone else claims you as a dependent, they can take it. The credit maxes at $4,000 per year. As we mentioned above, it lowers your taxable income rather than your tax directly. The income limits are $80,000 for single and HOH and $160,000 for married filing joint. You can deduct expenses for tuition and fees, but not room, board or other personal costs.

In other words, if your tuition and fees were $15,000 for the year and you had $10,000 in grants and scholarships and paid the remaining $5,000 via student loans, you cannot take this deduction. Only amounts paid directly to the college are deductible, so this makes book fees likely ineligible. You can’t double dip either. So either you take this deduction or one of the credits above. Smart money is on running your taxes both ways to see which gives you the best results.

Using the Student Loan Interest Deduction

To use this deduction, you must have paid interest on a student loan during 2013 and are filing single, head of household or married filing jointly. Again, you can’t be a dependent on someone else’s return or married filing separate status. Your modified adjusted gross income must be less than $75,000 for individual filers and $155,000 for joint filers, but begins to phase out at $60,000 and $120,000 respectively. The loan must have been yours, your spouse’s or your dependent’s to qualify.

The deduction is only for interest paid on the loan – not principal. Loans taken out for tuition, fees, books, room and board all qualify. Loans must be from a qualified lender (i.e. college/university, federal or private student loan) rather than an employer or family member. If you pay more than $600 in interest, you should get a Form 1098-E. You can take the deduction even if you don’t get the form, though. The deduction is limited to the lesser of $2,500 or the amount of interest you paid.

Final Notes

You cannot combine any of these credits and deductions. For instance, if you are being responsible and paying student loan interest while still in school so that you are eligible for both the American Opportunity Credit and the Student Loan Interest deduction, you can’t take both, so you’ll need to figure out which is the most advantageous.

Some automated tax return programs may be savvy enough for you to input your info and let it make a recommendation. Otherwise, you may need to toy with it manually to figure out your best result. Online - Save 15% on H&R Block At Home ProductsIf you decide to use tax prep software – which is an affordable option to get expert preparation help – H&R Block offers a wide range of software to assist you. From their website, you can purchase tax prep products that range from free to $49.99 and all come with free advice to make sure you get the best results. Click here to save 15% on H&R Block Online Tax Software.

To keep track of your loans and get the info you need to verify your Form 1098-E interest info, sign up for’s free student loan tool. And be sure to keep an eye on our blog for money tips and check out our Student Loan Help Center for guides and info on student loan matters.