Is it Possible to Deduct Education Expenses

in Tax Deductions


One of the defining characteristics of the American tax code is that it is specifically designed to encourage behavior that the government believes are productive and desirable. Not surprisingly, this includes higher education which leads to a better educated and more productive society and workplace. Therefore there are a host of different tax credits and deductions that relate to expenses associated with higher education. However, like all programs administrated by the Internal Revenue Service (IRS), it can be challenging to determine what expenses are covered by each credit or deduction and what can – or can not – be claimed. The basic rules are presented in IRS Publication 970, which runs to ninety-nine pages in PDF format for 2009. In 2009, the most education expenses can be claimed against your tax liability by using the three primary tax credits: the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit.

The American Opportunity Credit (AOC) requires you to meet two primary conditions before you can claim it. First, you have to pay the qualified education expenses yourself, for either yourself or an eligible student (which includes yourself, your spouse, or a dependent that you claim on your annual tax return). Second, you cannot be claiming the Hope Credit (see below) for any student for the same year. You cannot claim the AOC if you: (a) file as married, filing separately; (b) you are listed as an dependent; (c) your modified adjusted gross income (MAGI) is $90,000 or higher (or $180,000 or higher if married and filing jointly); (d) if you or your spouse were a nonresident alien during any part of the year; (e) if you claim the Lifetime Learning Credit or the tuition and fees deduction for the same student in the same year; or (f) if you claim the Hope credit for any student during the year. The maximum limit of the tax credit is $2,500 and all the relevant information is provided in IRS Publication 970.

The Hope Credit (HC) is an older tax credit that has been replaced by the AOC (see above) for most students, though the Hope Credit is still applicable to students attending schools in the federally-declared Midwestern disaster areas. The basic requirements to still qualify for the Hope Credit are that the student has to be attending a qualifying institution of higher learning in the Midwestern disaster area and you cannot be claiming the AOC. The Midwestern disaster areas include a defined list of counties in several states: Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. The complete list is provided in IRS Publication 970. This tax credit has a higher limit that the AOC, covering up to $3,600 in qualifying expenses. Like all tax credits, the terms and conditions are complicated and so a comprehensive review of Chapter 3 of IRS Publication 970 is a good idea.

The third primary tax credit is the Lifetime Learning Credit (LLC). This credit has much the same qualifying conditions as the AOC, except that it can be claimed against expenses beyond the first four years of college and there are no set limits on how many years the credit can be claimed. This is somewhat offset by the fact that the credit is smaller, reaching a maximum of $2,000; although this is doubled for students in the Midwestern disaster areas described above. The overall terms and conditions for the LLC are easier, so this is probably the best tax credit for many people to explore. Chapter 4 of IRS Publication 970 provides all the essential information.

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