Students across the country are heading back to school this month. The payment of tuition fees, organizing student loans and other education-related expenses always draws out many questions about what education costs will result in credits or tax deductions for students, recent grads, and parents. To help with answers, we have put together a summary of the available credits and deductions available to offset education costs.
Not All Education Costs are Deductable
Up until the 2017 tax year, education expenses, including tuition, books, equipment or other fees, were eligible for deduction from your gross income. For subsequent years, the only eligible deduction is for interest paid on a student loan. In this case, there are some criteria to be met; you must have used the loan money to pay for higher education expenses, and you must not be listed as a dependent on anyone else’s tax return. In addition, your modified adjusted gross income (MAGI) must fall below a certain threshold, depending on whether you file as a single person or jointly.
Available Tax Credits for College Students
College students or their parents and guardians may be able to claim one of two available tax credits. The American Opportunity Tax Credit (AOTC) offers up to $2,500 that can be claimed to offset costs for up to four years of undergraduate study in a qualifying academic institution. Your MAGI must be below $90,000 (or $180,000 for joint filing). AOTC is a refundable tax credit, which means that even if your tax liability is $0, you can receive a refund for the remainder of the credit. Furthermore, the credit can be transferred to a parent or guardian if the student is a dependent and has no taxable income.
Once the four years of AOTC has been claimed, the Lifetime Learning Credit (LLC) of up to $2,000 is available for students enrolled in undergraduate, graduate or technical school studies. There is no limit on the number of years that this credit can be claimed however, the LLC is only available to taxpayers who are not listed as dependents on anyone else’s tax return.
Tax-Free Scholarships
Income from scholarships or fellowships may be tax-free, depending on what the money is used for. You must be a candidate in a qualifying degree program, and the money must be used to cover the cost of tuition, books, fees and other costs of enrollment in that program. Other costs such as room and board or travel are not eligible expenses, in this case.
Educational Assitance Programs
Some employers provide educational assistance benefits to employees to help offset the cost of tuition and other expenses. It may be possible to exclude these benefits from your income. However, doing so may mean that you cannot use any of the other education tax credits or deductions.
Need help making sense of how education expenses related to your taxes? Give our tax preparation experts a call to ensure that you, your spouse and your kids maximize all of the education-related tax breaks available.
