Are College Entrance Exams Tax Deductible?

The fees for taking SAT, ACT and other college entrance exams are not tax-deductible, but there are educational deductions and tax credits to help offset your family's college expenses. Find out more about these educational tax deductions and tax credits and how they can benefit you.

• What are the tax breaks?
• Deducting expenses
• Lifetime Learning Credit

• American Opportunity Credit
• Claiming education credits

Key Takeaways

• Fees for college entrance exams are not tax-deductible, but there are other education-related tax breaks available.
• The Lifetime Learning Credit and American Opportunity Credit can be claimed by eligible taxpayers to reduce taxes owed and possibly generate a tax refund.
• The Lifetime Learning Credit can be claimed for undergraduate and postgraduate studies, while the American Opportunity Credit is for students in their first four years of post-secondary education.
• Eligibility for education tax credits is subject to several requirements, such as income limits and enrollment in a qualified program.

What are the tax breaks?

Unfortunately for mom and dad, the fees for taking SAT, ACT and other college entrance exams are not tax-deductible. Fortunately, the federal government does allow a number of educational tax deductions and tax credits to offset the current college expenses of students already enrolled in college.

Deducting expenses

Through 2020, you could claim the tuition and fees deduction for college expenses incurred for yourself, your spouse or your children. Beginning in 2021, the tuition and fees deduction is no longer available.

• The deduction was available even if you didn't itemize and it covered tuition and mandatory college expenses up to the maximum set by the IRS for the current tax year.
• Mandatory expenses included, for example, student activity fees if every student is required to pay them.
• The IRS halved the deduction for taxpayers above a certain income level, and as income rose further, the deduction was phased out completely.

TurboTax Tip:

You can file IRS Form 8863 to claim education credits, and you can only claim them for out-of-pocket expenses, not costs covered by other forms of financial aid.

Lifetime Learning Credit

The Lifetime Learning Credit allows you to claim up to 20% of your out-of-pocket college expenses each year for yourself, your spouse and your children.

• You can claim a maximum credit of $2,000, if your family's total college expenses add up to $10,000.
• You can claim the Lifetime Learning credit for as many years as the student attends college and for both undergraduate and postgraduate studies, even if the student attends only one class a year.
• The IRS lists other educational tax credits in Publication 970.

The Lifetime Learning Credit has several restrictions:

• The student must attend what the IRS considers a "qualified college" to claim the credit. A qualified college is one that is eligible to participate in Department of Education student aid programs.
• In addition, you can't claim the credit if your annual income exceeds the limit set by the IRS for the current tax year or you are married but you and your spouse file taxes separately.
• The maximum credit is $2,000 but none of it is refundable.

American Opportunity Credit

The American Opportunity Credit is another way for taxpaying students or their parents to offset some of the cost of attending college. The credit typically offers greater tax savings than a tuition deduction since it reduces the tax you owe on a dollar-for-dollar basis rather than just reducing the amount of income subject to tax. However, there are several requirements for eligibility:

• An eligible student is a person who has not completed the first four years of post-secondary education,
• enrolls in at least one academic semester during the applicable tax year, and
• maintains at least half-time status in a program leading to a degree or other credential.
• If the student has ever been a state or federal criminal because of a drug conviction, then they aren't eligible for the tax credit.

Generally, the American Opportunity Credit is the most generous because up to 40% of the credit is refundable - meaning that even if you don't owe any tax, you can still get some money back form the IRS.

Claiming education credits

When you file your tax return, you claim your tax credits using IRS Form 8863.

• You can only claim the credits for out-of-pocket expenses, not costs covered by grants or veterans' benefits.
• You can only claim one of the credits or deduction for each student on a tax return.
• You cannot claim deductions or tax credits for room, board, medical expenses, student health fees, transportation or insurance, even if the fees are mandatory for students.

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~37% of filers qualify. Simple Form 1040 returns only (no schedules except for Earned Income Tax Credit, Child Tax Credit and student loan interest).

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