Spring brings a lot of things to look forward to, but preparing to file your taxes isn’t usually one of them. Fortunately, there’s a few education tax breaks designed to help maximize your tax return. Here’s an overview of the credits and deductions you might qualify for, both during and after college, and the requirements for each.
You’ve basically got 2 options to get some of your college expenses back.
When it comes to income tax time, you can either claim one of the education credits, or a deduction. For those who didn’t take tax ACCT 430, also known as Income Tax Accounting, there’s a major difference between the two. A credit is an “above-the-line” tax break, meaning it comes right off the top of your taxes, dollar-for-dollar. So with a $500 credit, you pay $500 less in taxes. (Woot, woot!) On the other hand, a deduction reduces the amount of your income that is subject to tax, which typically reduces the amount of tax you end up paying. For example, if your income is $40,000 but you have a $500 deduction, you’ll now be taxed on only $39,500 of income. This should also save you money, just not nearly as much.
Bottom line, a credit usually benefits you more than a deduction, but do the math to be sure.
Let’s look at the 2 educational tax credits first.
Both the American Opportunity tax credit and the Lifelong Learning credit can give you thousands back at tax time. However, in general, most people should use the American Opportunity tax credit if they qualify. Of all the options, it is the most generous, providing a maximum credit of $2,500 per student. Plus, as much as 40% is refundable in the event the credit exceeds your taxable income. Expenses like tuition, required fees and course materials qualify for the credit. However, things like transportation or room and board do not. The American Opportunity tax credit is available for up to 4 years of undergraduate college education to current students enrolled at least half-time. If you’ve already finished 4 years of college, then you are no longer eligible. There’s also income restrictions limiting the credit. High earners receive only partial credits, or are ineligible.
The Lifelong Learning credit is less restrictive and offers up to $2,000 credit per return. As its name suggests, the Lifelong Learning credit is available throughout your lifetime whether as an undergrad, graduate student or nontraditional student taking classes for job training. The same expenses qualify, however, the credit is nonrefundable, meaning you can’t use it if you don’t have tax liability. Income restrictions also exist, but the limits are lower than with the American Opportunity tax credit. Generally speaking, you’re in the clear for either credit if your income is below $55,000 annually as an individual, or $111,000 as a couple filing jointly.
Not eligible for either? You may qualify for a deduction.
For the naysayers, the Tuition and Fees Deduction still exists! It had lapsed at the end of 2016 but was extended through 2017 by the Bipartisan Budget Act, signed February 9, 2018. This deduction can reduce your taxable income by up to $4,000. While it may not be as advantageous as the tax credits mentioned earlier, it’s still a significant savings. Also, you can claim it without having to itemize your deductions. Qualifying expenses are the same as for credits: tuition, fees, books and supplies. At higher income levels, $65,000 for individuals or $130,000 for joint filers, the deduction is reduced or even eliminated. Additionally, the deduction isn’t available for those who claimed Married Filing Separately, or can be claimed as a dependant.
The Student Loan Deduction was also at risk of being eliminated last year. It allows borrowers to deduct up to $2,500 each year for the interest paid on their student loans. The maximum taxpayers save by doing so is $625 per year, however, this benefit too phases out as your income increases past $80,000 per individual, or $160,000 per couple. The tax bill proposed by the House in November proposed to remove this deduction, but the final tax bill kept it in place.
Watch for additional education tax breaks.
We’ve said this before, college pays off. Not just because graduates make about a million dollars more than their non-college counterparts, but also for the tax advantages. Tax-Free Waivers benefit about 145,000 graduate students in the U.S. who get free tuition by working as a student teacher or researcher. The money they save on tuition is untaxed, and encourages individuals to further their education. Additionally, Tuition Assistance is offered by many employers as part of their benefits package. They can provide up to $5,250 per year toward their employee’s tuition for continuing education, and the money isn’t taxed.
In general, the government recognizes higher education is a good thing, and makes it more accessible through the provisions of education tax breaks. Be sure to take advantage of your options, and do the homework to get the biggest savings.