Tax Deductions and Credits
A tax deduction reduces a filer’s taxable income at their marginal tax rate. For instance, a filer in the 25 percent tax bracket with a $1,000 deduction saves $250 in taxes. A tax credit reduces the amount a filer pays to the IRS dollar for dollar.
The Taxpayer Relief Act created the Hope Scholarship Tax Credit and Lifetime Learning Tax Credit, which provided a dollar-per-dollar reduction of tax liability for the first two years of postsecondary education up to $1,500. The Lifetime Learning Tax Credit provided a dollar-per-dollar reduction of tax liability for unlimited years of postsecondary education up to $2,000.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) enabled taxpayers to claim a Hope Scholarship Tax Credit and Lifetime Learning Tax Credit in the same year that they claim an exclusion from contributions made to an education savings account (e.g., Coverdell and 529 plans.) EGTRRA stipulates that the same expenses can not used for both benefits. It also enabled taxpayers to claim a deduction for qualified tuition and related expenses, which reduced the amount of income subject to tax by up to $4,000 if the tax filer’s adjusted gross income for the taxable year did not exceed a certain amount and expanded eligibility for tax deductions for the interest paid on student loans. It achieves this by increasing the maximum deduction amount to $2,500 and removing the 60-month limit on loan interest deductions.
The Pension Protection Act permanently extended the rule enacted under EGTRRA allowing taxpayers to claim a Hope Scholarship Tax Credit and Lifetime Learning Tax Credit in the same year that they claim an exclusion from contributions made to an education savings account, as long as the same expenses are not used for both benefits.
The American Opportunity Tax Credit (AOTC) was created to temporarily replace the Hope Scholarship Tax Credit for the 2009 and 2010 tax seasons. The AOTC increased the Hope Scholarship Tax Credit limit, expanded the number of years a taxpayer could claim the credit, and made more high- and low-income individuals eligible. It also included course materials as a college expense.
The Protecting Americans from Tax Hikes Act permanently extended AOTC and extended tax deductions for tuition and education expenses through December 2016.