A tax credit generally reduces the income tax you owe dollar for dollar. A deduction generally reduces the income on which your tax is calculated. This means a $2,000 credit can be more valuable than a $2,000 deduction, although eligibility and the taxpayer’s circumstances determine the actual benefit.

For higher education, there are two main federal credits. They are the American Opportunity Tax Credit and the Lifetime Learning Credit. In addition, qualifying work-related education may be deductible as a business expense for certain taxpayers, especially people who are self-employed.

The American Opportunity Tax Credit, or AOTC, is generally aimed at the first four years of postsecondary education for a student pursuing a degree or another recognized credential. The maximum credit currently is $2,500 per eligible student. Up to 40% of the allowable credit, no more than $1,000, may be refundable, meaning an eligible taxpayer could receive that portion even when the credit exceeds the tax owed.

Qualified costs can include tuition, required enrollment fees, and course materials such as books, supplies, and equipment needed for attendance. Those materials do not necessarily have to be purchased from the school. Income limits, enrollment rules, the student’s status, prior years claimed, and other restrictions still apply.

The Lifetime Learning Credit, or LLC, is broader in some ways. It can apply to undergraduate or graduate education and courses taken to acquire or improve job skills. The student does not have to pursue a degree, and there is no four-year limit, like there is for the AOTC.

The credit equals 20% of up to $10,000 of qualified expenses, producing a maximum credit of $2,000 per tax return, not per student. It is nonrefundable, so it can reduce tax to zero but will not create a refund by itself. The school must normally be an eligible educational institution, and income and filing-status limitations apply.

For a self-employed consultant, contractor, farmer, real estate professional, or other business owner, different rules apply. Work-related education can generally qualify as a business expense when it maintains or improves skills required in the taxpayer’s current work.

Here is the catch, it seems like there’s always a catch. Education generally does not qualify as a work-related business deduction if it is needed to meet the minimum requirements of the taxpayer’s present work or if it qualifies the person for a new trade or business. A bookkeeper taking an advanced QuickBooks course may have a stronger deduction argument than someone taking the education necessary to become a lawyer for the first time.

For self-employed taxpayers, qualifying costs are generally deducted on the business return, such as Schedule C or Schedule F. The result may reduce both income tax and self-employment tax. Most regular employees, however, cannot currently deduct unreimbursed job-related education as a miscellaneous itemized deduction. Though, limited exceptions apply to certain categories of workers.

1. Document the business reason before the course begins. Save the course description, syllabus, receipt, proof of payment, and a short note explaining how the education maintains or improves skills in your existing business. If continuing education is required for a license, retain the licensing rule or renewal notice.

2. Separate education expenses from personal spending. Keep tuition, fees, books, supplies, travel, scholarships, employer assistance, and reimbursements clearly identified. Form 1098-T is important, but it may not show every qualifying expense or the exact amount ultimately eligible for a credit.

Do not claim the same expense twice. The same tuition dollars generally cannot be used both for an education credit and a business deduction. Expenses paid with tax-free scholarships, grants, employer educational assistance, or tax-free 529-plan distributions may also need to be removed before calculating a credit.

Do not assume every online course is deductible. A course sold by a private trainer may support an existing business skill, but that does not automatically make it eligible for the AOTC or Lifetime Learning Credit. Those credits generally require attendance at an eligible educational institution. The reason for the course and the type of provider both matter.

Education is often an investment made before the payoff is visible. A new skill may help you serve clients better, maintain a professional credential, or create a new opportunity. The tax law will not reimburse every cost, but it may reduce the financial burden when the rules are met.

Before filing, ask: 

These few questions can reveal a benefit that might otherwise might be missed. They will help you choose the correct credit or deduction.

If you paid for college, continuing education, or professional training, The Smith Advisory can help determine whether the expense may qualify for an education credit or a tax deduction and help you avoid claiming the same cost twice. Feel free to contact us at [email protected] so you can file your taxes confidently and a better understanding of the tax benefits available to you.

This article is for general educational and informational purposes only and is not legal, tax, accounting, or financial advice. Tax eligibility depends on individual facts, current law, income, filing status, the educational institution, and how expenses were paid; consult a qualified tax professional regarding your specific circumstances.