College students, recent grads, and parents who help with college expenses can pay less in taxes just by paying for school. Seriously! And it's easy, too -- all they have to do is claim one of these education tax credits or deductions on their federal income tax return.
You may think "filing taxes" and "easy" don't belong together. However, we broke down your four main options to help you better understand them. You can't claim both education credits or a credit and the tuition and fees deduction in the same year, so crunch the numbers or talk to a tax professional to figure out which puts the most money in your pocket.
Tax Credit Options
Tax credits increase your savings by decreasing the tax you owe the government, regardless of what you did or did not pay during the year through withholding or tax estimates.
For instance, if you owed $4,000, a credit of $2,500 would shrink your bill to $1,500. Even better? Any refundable portion of a credit that exceeds what you owe goes straight to you. Students have two tax credit options to choose from: the American Opportunity Credit and the Lifetime Learning Credit.
Option #1: American Opportunity Credit
Whom it's for: Students/parents can use this credit during the first four years of a post-secondary education (sorry, grad students -- you probably won't qualify). In addition, eligible students must:
- Not have a drug conviction.
- Not have already claimed this credit or the former Hope Credit for four years.
- Be enrolled in at least half of a full workload for one academic period during the year.
- Be a candidate for a degree, certificate, or other recognized educational credential.
In addition, if you have a filing status of "married filing separately" or if another person can claim an exemption for you as a dependent on his or her tax return, you won't be eligible.
How much it's worth: This credit covers 100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000 of qualified expenses, for a maximum credit of $2,500. If the credit brings the amount of tax you owe to $0, you can have up to $1,000 refunded directly to you!
If you are a student under age 24, you likely won't be able to get the $1,000 refundable part of the credit unless you support yourself with income from your job.
Expenses that qualify: Pretty much any expense required for enrollment and attendance. These include tuition, fees, and any course materials (including textbooks) that you paid during the tax year.
Option #2: Lifetime Learning Credit
Whom it's for: Students/parents who don't meet the requirements for the American Opportunity Credit, including grad students. You are ineligible if you have a filing status of "married filing separately" or if another person can claim an exemption for you as a dependent on his or her tax return.
How much it's worth: The credit is nonrefundable -- so you won't see any cash in your tax refund from it. It has a maximum yearly value of $2,000 or 20 percent of up to $10,000 of qualified expenses. While you can claim this credit an unlimited number of times, you can only claim it once per year -- regardless of how many students are on your tax return.
Expenses that qualify: You can claim this credit for qualified expenses for post-secondary degree programs or for programs taken to acquire or improve job skills. Qualified expenses generally include all costs to enroll in/attend an eligible educational institution.
Things like books, supplies, and equipment generally do not qualify unless you must pay the school directly for them as a condition of enrollment.
Tax Deduction Options
Tax deductions increase your savings by decreasing the income that the government taxes you on.
For instance, say you earned $35,000 in taxable income this year. Qualifying for a $4,000 deduction would decrease that taxable income to $31,000. That's $4,000 that you don't owe any taxes on!
Students and their parents have two tax deductions available to them: the tuition and fees deduction and the student loan interest deduction.
Option #1: Tuition And Fees Deduction
Whom it's for: Any taxpayer who paid qualified education expenses. However, you are ineligible if you have a filing status of "married filing separately" or if another person can claim an exemption for you as a dependent on his or her tax return.
How much it's worth: This deduction covers 100 percent of qualified higher education expenses up to $4,000. The actual maximum you qualify for will depend on your modified adjusted gross income (AGI).
Expenses that qualify: Generally, qualified expenses include all costs that you have to pay in order to enroll/attend an eligible educational institution.
Option #2: Student Loan Interest Deduction
Whom it's for: Any taxpayer who paid interest during the year on a qualified student loan.
How much it's worth: You can deduct up to $2,500.
Loans that qualify: Generally, only loans taken out to pay for qualified education expenses are eligible; this includes Parent PLUS loans. Qualified expenses generally include the total cost of attending an eligible school of higher education (as either an undergraduate or a graduate student), as well as tuition, fees, room and board, books, supplies, equipment, and any other necessary expenses.
In addition, you must have paid for or incurred these expenses within a reasonable amount of time from when you took out the loan. The expenses also must have been for the student's education during an academic period when he or she was an eligible student.
To learn more about these deductions and credits, check out Publication 970 or the Internal Revenue Service (IRS) website. And remember, it's always a good idea to check with a tax professional to be sure you're claiming benefits correctly.
What If My Employer Helps Me Pay For School?
Some companies offer to help pay your tuition costs as a way to invest in employee development. If your company offers this assistance:
- Generally speaking, you can receive up to5,250 toward undergraduate or graduate tuition, fees, and books totally tax-free (usually through reimbursement).
- Additional assistance may be taxable. Speak to your employer to find out more about your specific situation.
- Another rising trend is employers offering student loan repayment as an employee benefit. Depending on how your employer makes the payments toward your student loans, you may have a minimal tax bill if the payment is considered income. Your employer may deduct the tax directly from the payment or your paycheck, or you may be responsible for it when you file your tax return each year. Talk to your payroll office to learn more.
This article was prepared for informational purposes only and is not meant to be tax or legal advice. Please see your tax professional for additional guidance.
This article was provided by H&R Block and H&R Block Dollars & Sense. SALT® has teamed up with these organizations to help students and alums find ways (like education credits and deductions) to borrow and repay student loans in a way that works for them.
SALT® is a free and unbiased nonprofit-backed financial education program dedicated to giving students, alumni and families the money knowledge they need for college and beyond.