Whether you’re currently paying your children’s higher education expenses or you’re attending college or graduate school yourself, you might be eligible for valuable tax savings on your 2014 return in the form of a tax credit or a deduction.

Credits

If you’re eligible for a credit, it generally will be more valuable because a credit reduces your tax dollar-for-dollar. (A deduction only reduces the amount of your income subject to tax.) For 2014, two tax credits are available for higher education expenses. The credits may be reduced or eliminated entirely due to phaseouts based on your modified adjusted gross income (MAGI):

American Opportunity. This credit equals up to $2,500 per student for qualifying expenses for the first four years of postsecondary education. The phaseout ranges are $160,000–$180,000 (joint filers) and $80,000–$90,000 (other filers).

Lifetime Learning. This credit equals up to $2,000 per tax return for qualifying expenses for postsecondary education even beyond the first four years. The phaseout ranges are $108,000–$128,000 (joint filers) and $54,000–$64,000 (other filers).

If your MAGI is within the applicable phaseout range, you can take a partial credit. But if your MAGI exceeds the top of the range, the credit is eliminated entirely.

Deductions

If you’re ineligible for the American Opportunity credit because your education expenses aren’t for the first four years of postsecondary education and you’re ineligible for the Lifetime Learning credit because your income is too high (or if you have more than one student in your family), you may still be eligible to deduct up to $4,000 of qualified higher education tuition and fees per student on your 2014 return.

This deduction is referred to as an “above-the-line deduction.” This means you can reduce your taxable income regardless of whether you itemize deductions. The maximum deduction is only $4,000 for taxpayers whose MAGI is less than $130,000 (joint filers) or $65,000 (other filers). If your MAGI is above those amounts, a reduced deduction may be available. The reduced deduction is $2,000 for taxpayers whose MAGI is $130,000–$160,000 (joint filers) or $65,000–$80,000 (other filers). If your MAGI is above these amounts, you can’t take any deduction.

Caveats

Married taxpayers filing separately aren’t eligible for any of these tax breaks. Also, you can’t take both an education credit and a tuition and fees deduction for the same student.

Because the rules surrounding these education breaks are complicated, professional tax advice is critical. To learn whether you’re eligible for any education related tax breaks, and if so which one(s) will provide you with the greatest benefit, please contact us.