Can I Deduct Graduate School Tuition?

March, 23 2023 by Karen Thomas-Brandt, EA

You made it! You worked hard and got through four (maybe more) years of undergraduate school! Now you are thinking about continuing and going to graduate school. But the cost! You remember you had some significant tax breaks with your undergraduate expenses, so now you may be wondering, “Can I deduct graduate school tuition?” 

While there are some tax-saving opportunities available, like the credits for undergraduate expenses, they each have some limitations. Let’s look at each option. 

 

American Opportunity Credit

The American Opportunity Credit (AOC) is only available for up to four years and to those students who still need to complete their first four years of post-secondary school (at the beginning of the tax year). Given these limitations, most students “use up” their opportunity to take AOC during their undergraduate schooling; however, there is a small window of opportunity for some graduate students. For example, let’s say you start the tax year in the fourth year of your undergraduate studies, then graduate in the Spring semester and begin graduate school in the Fall semester. In this case, and for this tax year only, you could claim the AOC for up to $4000 of your qualifying expenses for the tax year (including those paid for that Fall semester of graduate school). The reason you can still claim AOC (in this example) is that you started the tax year still in the first four years of postsecondary (undergraduate) school, and you have not yet taken AOC for four years. 

Qualifying education expenses for AOC include:

• Tuition,
• Mandatory enrollment fees, and
• Books and course materials required by the institution.

In addition to the qualifications mentioned above, to claim the AOC, you must:

• Be pursuing a degree from an eligible educational institution.
• Be enrolled at least half-time for at least one academic period (as determined by the school) beginning in the tax year.
• Not have a felony drug conviction at the end of the tax year.
• Have a modified adjusted gross income under $90,000 ($180,000 if married filing jointly).
• Not file as married filing separately.

• Have received Form 1098-T (or similar statement) reflecting qualified amounts paid to the eligible educational institution. 

The advantage of the AOC is that it is worth a maximum credit of $2500 per eligible student, with up to $1000 of that amount being refundable. 
 

Lifetime Learning Credit

Alternatively, there is the Lifetime Learning Credit (LLC), which has a lower credit amount than the AOC but is available for ALL years of postsecondary education. The LLC covers 20% of up to $10,000 of qualified education expenses (for a total credit amount of up to $2000 per tax return).

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.

To claim the LLC, you must:

• Be taking courses from an eligible educational institution.
• Be taking higher education course(s) to get a degree or other recognized education credential or to get or improve job skills.
• Be enrolled for at least one academic period (determined by the school) beginning in the tax year.
• Have a modified adjusted gross income under $90,000 ($180,000 if married filing jointly).
• Not file as married filing separately.

• Have received Form 1098-T (or similar statement) reflecting qualified amounts paid to the eligible educational institution.

As you can see, while the tax credit amount of the AOC is higher than the LLC, the qualifications for taking the LLC are a bit easier to meet than the AOC. In addition, you can take the LLC for as many years as you qualify, but the AOC is limited to four. Please note that if you are eligible to claim the American Opportunity Credit and the Lifetime Learning Credit, you can choose which credit to claim, but you cannot claim both (for the same student).