Guide to education tax credits and deductions for 2023 taxes
Key takeaways
- Tax credits and deductions can help students, their parents, and educators offset the costs of higher education and classroom supplies.
- For the Lifetime Learning credit and the American Opportunity Credit, income limits of $90,000 for single filers and $180,000 for joint filers apply.
- The income limit is $80,000 for single filers or $170,000 for joint filers for the student loan interest deduction.
- The educator expense deduction covers expenses up to $300 in 2023 and does not have an income limit.
College tuition rates are on the rise. Tuition rates have skyrocketed by over 700 percent since 1963 when adjusted for inflation. If you are a student or parent, keeping up with these costs from year to year can be overwhelming.
One windfall available to many comes through tax credits and deductions each year. While these don’t offset large portions of the costs of pursuing an education, they can be helpful. What education expenses are tax deductible for the 2023 tax year, and how can you benefit from the breaks available?
Education tax credits and deductions at a glance
| How much is it worth? | Who qualifies? | What is the income cap? | |
|---|---|---|---|
| Lifetime Learning Credit | Up to $2,000 | Taxpayers who pay qualified educational expenses for themselves, their spouse or a dependent | Single: $90,000Joint: $180,000 |
| American Opportunity Tax Credit | Up to $2,500 | Taxpayers who pay qualified educational expenses for themselves, their spouse or a dependent | Single: $90,000Joint: $180,000 |
| Student loan interest deduction | Up to $2,500 in taxable income reduction | Taxpayers who pay interest on qualified student loans that they’re legally obligated to pay | Single: $80,000Joint: $170,000 |
| Educator expense deduction | Up to $300 in taxable income reduction | Educators who pay unreimbursed expenses for their classrooms | N/A |
Education tax credits for 2023 taxes
American taxpayers can take advantage of one of two different college tax credits to get back some of the money that they paid for postsecondary education. When you file your tax return, you can choose one or the other in the same year, but not both. You can, however, get one credit in one year and the other in a different year.
Unlike deductions, which reduce the income amount the IRS uses to calculate how much you owe, tax credits are a dollar-for-dollar reduction of your tax bill. In this way, they’re more beneficial.
Lifetime learning credit
The lifetime learning credit is a tax credit for tuition and fee payments to a postsecondary educational institution, as well as other qualified expenses. The credit is worth 20 percent of your first $10,000 in expenses, up to a maximum $2,000 credit per return. Eligible expenses include tuition and fees.
You can’t double-dip on benefits, so you can’t include expenses paid for by scholarships, fellowships, Pell Grants, employer tuition assistance, school refunds or other nontaxable assistance. The same goes for distributions from a 529 plan, Coverdell education savings account or savings bond.
There’s no limit on how many times you can claim the lifetime learning credit, making it a valuable tax break for college students who return to graduate school. You also don’t have to pursue a degree to take advantage of the lifetime learning credit. You can count your expenses incurred to earn a recognized educational credential or to improve your job skills at an eligible educational institution.
The lifetime learning credit is nonrefundable, which means that it can help reduce your tax bill to zero, but you won’t receive any of the excess amount in the form of a tax refund.
To qualify, you need to be under the education credit income limits. That means having a modified adjusted gross income (MAGI) of less than $90,000 (single filers) or $180,000 (joint filers). The credit amount is gradually reduced based on income, with reductions starting at $80,000 (single filers) or $160,000 (joint filers).
American Opportunity Tax Credit
The American Opportunity Tax Credit is available to college students who have not yet completed the first four years of their postsecondary education. Eligible expenses you can count toward the credit include tuition and fees, along with books, supplies and equipment, as long as they’re required for enrollment. But unlike the lifetime learning credit, you can purchase those items from other sources, not just your school.
The amount of the credit is up to $2,500, calculated as 100 percent of the first $2,000 spent on qualified expenses plus 25 percent of the next $2,000 you spend.
Like the lifetime learning credit, you have to reduce your qualified expenses by the amount of aid you receive through nontaxable assistance like scholarships, fellowships, Pell Grants, employer tuition assistance and school refunds. Distributions from education savings programs are also excluded from your total.
You can use the American Opportunity Tax Credit only for the first four years of your postsecondary education. Because the credit is more generous than the lifetime learning credit, it’s the better option for undergraduate students.
Only 40 percent of the credit is refundable, which means that if it brings how much you owe down to zero, up to $1,000 of the value of the credit can be included in your tax refund.
This credit is available to filers with a MAGI below $90,000 (single filers) or $180,000 (joint filers), but the credit amount is reduced starting at $80,000 (single filers) or $160,000 (joint filers).
Education tax deductions for 2023 taxes
While deductions aren’t as valuable as credits, they can still reduce how much you owe on your taxes or increase your tax refund. Here are a few tax deductions you can use as a college student, student loan borrower or educator.
Student loan interest deduction
Student loan borrowers can deduct up to $2,500 spent on student loan interest each tax year. To qualify for the student loan interest deduction, you need to:
- Be legally obligated to make the payments.
- Have income under a certain amount (which can change every year).
- Not be married and filing separately or be claimed as a dependent on another person’s tax return.
At the beginning of tax season, if you paid more than $600 in interest over the previous year, you should receive a form from your student loan servicer or lender showing how much you paid in interest during the previous year. You can use this information to calculate the value of your deduction. The deduction is available to borrowers who have a MAGI under $85,000 (single filers) or $170,000 (joint filers), though deduction amounts are phased out for MAGIs over $70,000 (single filers) or over $140,000 (joint filers).
For the 2023 tax year, most federal student loan borrowers likely won’t benefit much from this deduction, as federal student loans were still in pandemic forbearance until Sept. 1. Federal student loan interest was at zero percent from March of 2020 through August of this year as a result of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Educator expense deduction
If you’re a teacher, instructor, counselor, principal or classroom aid, you may be able to deduct up to $300 in unreimbursed expenses for the classroom. Eligible expenses include books, classroom supplies, technology and computer software for teaching students.
Only educators who work with K-12 students qualify for the educator expense deduction, and you must work for an eligible school based on your state’s law and complete at least 900 hours of work during the school year. You won’t qualify if you’re a preschool or college educator or a parent who homeschools their children.
Other college tax benefits
If you’re a parent saving up for your child’s college education, setting aside money in a college savings plan can provide some tax perks.
With a 529 college savings plan, for instance, all of the money you contribute grows tax-free, and any withdrawals you make to pay for eligible expenses are also tax-free. If you make ineligible distributions, though, the money will be subject to income tax and a 10 percent penalty.
Many states offer their own tax deductions and credits for 529 plan contributions. Check with your state’s 529 plan provider to find out if you’re eligible.
Coverdell education savings accounts function similarly to 529 plans in that contributions grow tax-free and can be taken out for qualified educational expenses tax-free. However, you’re limited to $2,000 in annual contributions per beneficiary. In contrast, 529 plans technically have limits, but they’re set by state and are generally very high.
If you contribute more than the maximum amount, the excess funds will be subject to a 6 percent tax each year in which they remain in the account. Nonqualified distributions are subject to income taxes and a 10 percent penalty.
How has the coronavirus pandemic affected 2023 taxes?
The student loan interest deduction will once again help borrowers regarding 2023 taxes, as student loan interest began accruing again in September. For the first portion of the year, however, pandemic forbearance impacted many borrowers by keeping interest rates at zero percent on federal student loans.
As you prepare to file your tax return, consider working with a tax professional to help you navigate your 2023 tax situation.
