College is expensive! Wouldn’t it be nice if you get a tax break for college expenses? You may find yourself wondering – can I deduct education expenses for my dependent?
While the short answer is yes, some limitations and qualifications must be met. Additionally, when we talk about dependents and education expenses, you need to ask yourself a couple of questions: 1) Am I going to claim my dependent on my tax return? and 2) Which credit, or deduction, is the best to claim for the education expenses?
American Opportunity and Lifetime Learning Credits
The American Opportunity Credit (AOC) can be worth up to a $2,500 tax credit per
eligible student, with up to $1,000 being refundable. Additionally, the AOC is only available for four years of postsecondary education, including any years in which the Hope Credit was taken. The Lifetime Learning Credit (LLC) can be worth up to a $2,000 tax credit per
tax return, with the full amount being non-refundable. The LLC is available for all years of postsecondary education.
If you choose to claim your dependent on your return, only
you can claim an education credit for that dependent’s education expenses, regardless of who paid the expenses. If, however, you elect
not to claim your dependent on your return (even if you are entitled to claim the dependent), only your dependent can claim the education credit for their education expenses, regardless of who paid the expenses.
Keep in mind, however, that if your dependent claims the AOC, some conditions apply regarding the
refundable portion of the credit. For a student under age 24 that is not claimed as a dependent on another tax return (or eligible to be claimed as a dependent on another return) to qualify for the
refundable portion of the AOC on their tax return, one of the following must apply:
- Both parents are deceased, or
- Filing status is married filing jointly (MFJ), or
- Age 18 at the end of the year, and their earned income exceeded one-half of their support, or
- Age 19-23 at the end of the year, and not a full-time student during any part of five months in the year, or
- Age 19–23 at the end of the year, a full-time student during any part of five months in the year, and their earned income exceeded one-half of their support.
If none of these conditions are met, the dependent will not qualify for the refundable portion of the AOC. In this case, the nonrefundable portion of the AOC can be as high as $2,500. In this case, the bottom line is that the dependent will need to have some tax liability to benefit from taking the AOC.
Qualifying education expenses for AOC include:
- Tuition,
- Mandatory enrollment fees, and
- Books and course materials required by the institution.
Qualifying education expenses for LLC include:
- Tuition,
- Mandatory enrollment fees, and
- Books and course materials, only if required to be purchased directly from the school and are a condition of enrollment or attendance. If the books are only needed to participate in class, then the cost is not includable.
For both credits, you cannot claim the credit if any of the following apply:
- Your filing status is married filing separately (MFS).
- You are listed as a dependent on another taxpayer’s tax return.
- Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if married filing jointly (MFJ)).
- You (or your spouse) were a nonresident alien for any part of the tax year, and you (or your spouse) did not elect to be treated as a resident alien for tax purposes.
- You have deducted the same higher education expenses on your personal return as a business expense deduction.
- The qualified education expenses were paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer, which is excluded from taxable income.
- You claim the qualified education expenses to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP, i.e., 529 plan).
- The qualified education expenses are paid with tax-free interest on U.S. savings bonds.
Tuition and Fees Deduction
Even though the Tuition and Fees Deduction has not been available since the 2020 tax year, if you need to file or amend a return prior to 2021, you might want to consider the Tuition and Fees Deduction. With the Tuition and Fees Deduction, the rules about who can claim the education expenses get a bit more complicated.
If you choose to claim your dependent on your return, only you can claim the Tuition and Fees Deduction for that dependent’s education expenses if
you paid the education expenses (including payments with a credit card or loan in your name). No one can claim the deduction if the dependent or a third party pays the expenses. If you choose
not to claim your dependent on your return (even if you are entitled to claim the dependent), no one can claim the Tuition and Fees Deduction for that dependent’s education expenses.
Examples:
- In 2022, Mr. and Mrs. Zink, MFJ, elect not to claim their dependent daughter on their tax return, even though their dependent daughter qualifies as their dependent. The qualified education expenses for their daughter were $4,000, which were paid by her grandmother.
- Can the daughter claim the qualified education expenses on her 2022 return for the education credit?
Answer: Yes, even if paid by someone else.
- Can the daughter claim the qualified education expenses on her 2022 return for the tuition and fees deduction?
Answer: No, because the tuition and fees deduction expired at the end of 2020.
- Same circumstances as above, except Mr. and Mrs. Zink elect to claim their daughter as their dependent on their tax return.
- Can Mr. and Mrs. Zink claim their daughter’s qualified education expenses on their 2022 return for an education credit?
Answer: Yes, even if paid by someone else.
- If the above case had taken place in 2020, could Mr. and Mrs. Zink claim the qualified education expenses for their dependent daughter on their 2020 return for the tuition and fees deduction?
Answer: No, because the education expenses must have been paid by the taxpayers. The education expenses were paid by the grandmother.
Figuring out whether you can deduct education expenses can be tricky. If you find yourself facing an audit involving education credits or deductions and have an Audit Defense Membership, please
report your audit to us so we can help. If you don't have an
audit defense membership, consider getting one so we can help defend you in a future audit.