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Tuition Deduction Versus Tuition Tax Credits

The tuition tax credits [1] are popular right now, and I’m going to assume that many of you who are in college, or have kids in college are familiar with taking the tax credit.

However, it’s the less popular tuition and fees deduction that needs some more attention from most people.

College Tuition Tax Options

When you file your taxes, you can choose between two tuition tax options, but you cannot claim both:

When the Tuition Deduction Makes Sense

Since you can claim only the tax credit or the tax deduction, you’ll have to choose which one to take. Here are some times when you should consider the tuition deduction:

Integration with State Tax Rules. When I was filing taxes for my sister-in-law, the tuition credit was higher for her federal return, but the tuition deduction was actually higher for her state return. In her state, you must file the same way for both, so we actually chose the tuition deduction since it gave her a higher overall tax refund.

Higher Income. Usually, the typical reason that people claim the tuition deduction over the tuition credit is because of income. Even if you are ineligible for the tuition tax credits, you may still be able to claim the tax deduction.

Impact on Other Tax Credits. Because the deduction lowers your AGI [5], the deduction can sometimes bring back your eligibility for other credits, like the Retirement Saver’s Tax Credit [6].

Lower College Costs. If your college costs are significantly less than the limit on the tax credit, there are some circumstances, where you’ll actually be better off claiming the deduction. Again, it depends on the other factors on your return, including which tax bracket [7] you fall in, so you’ll want to run it both ways.

Calculate Both

When you file your taxes, if you qualify for both the tuition tax credit and the tuition deduction, compute your taxes both ways for both federal and state. Then file with the method that gives you the largest tax benefit.

For more tax saving ideas for parents, see 10 Ways to Lower Your Taxes with Kids [8].