Education Credits & Deductions
by Bob Williams
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This fall, as you wave goodbye to your college-age children heading off to university, don’t let that little voice in your head screaming “You can’t afford this!” ruin the moment. Take a deep breath, relax, and remember that the IRS has credits, deductions, and other tax breaks in place that can make higher education a pretty smart move.
A whole host of higher education tax benefits can be found on the IRS Website. But to hit a few of the high spots, here’s a sort of Cliff’s Notes of IRS tax breaks for anyone paying for college.
The Big Picture
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. Two credits are available, the American Opportunity Credit and the Lifetime Learning Credit. Each is targeted at a different type of education expense, which we’ll get to shortly.
In the meantime, though, know that these credits share some ground rules:
- You, your dependent or a third party has to pay qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible education institution in order to qualify.
- The eligible student must be you, your spouse or a dependent who’s listed on your tax return.
You can choose to claim either the American Opportunity Credit, or the Lifetime Learning Credit – but not both. Our software will automatically claim the credit that gives you the greatest benefit on your tax return.
American Opportunity Credit: This is a tax credit of up to $2,500 of the cost of qualified tuition and related expenses (course-related books and such). Up to $1,000 of the credit is refundable. The AOC is geared toward the under-graduate, paying for expenses in the first four years of college in pursuit of a degree. Learn more about the AOC
Lifetime Learning Credit: You may be able to claim a credit of up to $2,000 for qualified education expenses paid for all your students in eligible educational institutions. As a rule of thumb, the LLC could be your best choice for graduate students, students taking less than a full load, and students not actively pursuing a degree, such as professionals taking courses to maintain certifications. Check out Form 8863, Education Credits, to work out your possible credit under the AOC or LLC.
Tuition and Fees Deduction: You might be able to deduct higher education expenses for yourself, your spouse or a dependent. Now, you can’t do that if your filing status is Married Filing Separately, or if another person can claim you as a dependent on their taxes. The tuition and fees deduction could reduce the amount of money subject to taxation by up to $4,000. Since it’s an adjustment to income, the IRS says you can claim the deduction even if you don’t itemize deductions. If your income is too high to qualify for the Lifetime Learning Credit, this deduction could be the way to go. Work out your possible tax consequences under both credits and the tuition and fees deduction (Form 8917 will help you with the deduction) – then take the one that gives you the lower tax.
Student Loan Interest Deduction: If you earn less than $70,000 during the year (modified adjusted gross income), there’s a special deduction that covers the interest on a qualified student loan. Like the Tuition and Fees Deduction, it’s an adjustment to income, so you can claim it even if you don’t itemize deductions.
Did you have to go back to school because of your job, or the law, to keep your present level of pay? If so, the Qualifying Work-Related Education deduction may help you out. You might be able to deduct the costs of your education if:
- You are working now;
- You itemize deductions (if you’re an employee) or
- You file Schedule C, Schedule C-EZ, or Schedule F if you’re self-employed;
- You have qualifying work-related education expenses.
Remember, there are some requirements that have to be met before the IRS considers your education to be work-related. Check out Publication 970, Tax Benefits for Education, for details on this program – or any of the deductions and credits we’ve already mentioned.
While these deductions and credits may not mean a free ride at college, they can take a little more cash off your tax bill, and put it in your pocket. And that is a very smart move indeed.
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