Please note: Some of the following information has been taken from the IRS website (cited below).
One of the most expensive, yet rewarding, monetary investments you can make is in your child’s education. Since tax season is upon us, now is a good time to consider where you may qualify for tax credits and deductions. Seeking the advice of your accountant is always recommended regarding specifics on taxes. In this blog post, we will discuss various tax deductions and credits so that you can discern how your investment in your child’s college education may be less painstaking than you originally thought.
First things first, the terminology used to describe taxes may be confusing. Some common terms used in this blog are defined:
- Tax deduction: a reduction in the total amount of taxable income.
- Tax credit: a reduction in the total amount of taxes that you owe.
It is important to note that many of these tax credits and deductions may not be used simultaneously. Thus, it is important to find out whether a tax deduction or a tax credit for your dependent’s education will give you the greatest return. Unlike tax deductions, if your tax credits reduce your tax to less than zero, you may qualify for a refund.
There are two basic tax deductions that are applicable if you have or are financially responsible for a student loan or college tuition:
Tuition Fees and Deductions
You may qualify for the tuition fees and deduction if you pay for a higher education for yourself, or a dependent. Usually, the tuition fees and deduction will allow you to deduct up to $4,000 on tuition, student-activity fees, and expenses for course-related books, supplies, and equipment. Eligible candidates for this deduction include singles making an annual salary of $80,000 or less, or joint filers with an annual salary of $160,000 or less. Individuals who are married and choose to file their taxes separately are not eligible for the tuition fees tax deduction. The tuition fees and deductions are reported on a Form 8917 and it is taken as an adjustment to the filers taxable income.
Student Loan Interest Deductions
Student loan interest deductions may reduce taxes for some students by up to $2,500. To qualify, joint filers must make less than$150,000 annually and single filers must make less than $75,000 annually.
There are two main types of available educational tax credits that reduce the amount of taxes owed:
American Opportunity Credit
The American Opportunity Credit is optimal if you or your student is in his or her first four years of post-secondary education at an eligible educational institution. You may qualify for this tax credit if you are paying for a qualified post-secondary education for an eligible student (being either yourself or a dependent) for whom you claim the tax exemption. If you are paying for multiple eligible students’ post-secondary education, you may gain a tax credit of up to $2,500 for every qualifying student in the household. To qualify for this tax credit, the student must be pursuing a program leading to a degree or other recognized educational credential. The American Opportunity Credit excludes joint filers making more than $160,000 annually or single filers making more than $80,000 annually. This tax credit may only be claimed for the four years of post-secondary education and may not be combined with the Lifetime Learning Credit in the same tax year. Students are often given a Form 1098-T by their school detailing their year’s expenses. This form may be used as a reference to fill out the Form 8863 by the filer which should be attached to the filers Form 1040 and submitted.
Lifetime Learning Credit
The Lifetime Learning Credit is similar to the American Opportunity Credit in terms of eligible student criteria. The main differentiating factor for the Lifetime Learning Credit is that there is no limit to the amount of years that this credit may be claimed for each student. Using the Lifetime Learning Credit can give you a $2,000 credit for each qualifying student’s educational expenses. To qualify for the credit, the student must be enrolled in higher education courses, courses to get a degree, other recognized educational credentials, or courses to improve a job skill. The Lifetime Learning Credit excludes joint filers making $124,000 or more annually and single filers making $62,000 or more annually. This tax credit may not be claimed if you are married and filing taxes separately, if you are a dependent being claimed on another person’s tax return, or if you are claiming the American Opportunity Credit for the same student in the same year. To gain this credit, the Form 1098-T from the school must be reviewed, and the Form 8863 and 1040 must be submitted by the filer.
The general guidelines of these tax credits and deductions are pretty simple; yet, figuring out whether to apply for educational tax deductions or tax credits is dependent on your unique situation. Check out the IRS Tax Benefits for Education to find out more information before you file your taxes this year. As always, we suggest you talk to your accountant about what tax credit and deductions are right for your unique situation.