With all of the money you spend on education, don’t you think you should get some of it back? In a way, you can. There are a number of education deductions and credits for which you can get money back. However, if both a student and parent contribute to the student’s education, and the student is dependent, only one may claim a credit or Tax deduction. As with all of these tips, make sure that you qualify before claiming anything on your taxes this year. To learn more about how your loans affect your taxes, see our previous post To Claim or Not to Claim: College Loans and Taxes.
Tax deductions and credits are not the same. Tax deductions are amounts taken away from your taxable ie, so the specific amount your taxes are reduced depends on your tax bracket. A credit, however, takes off a certain amount in total. For the most part, credits can save you more money than deductions, though this is not always the case. Since you cannot take both a tuition deduction and education credit, do the math beforehand to decide which gives you the most money back.
Student Loan Interest Deduction: Any interest paid on your student loans are eligible for a deduction up to $2,500 providing the loan and student meet certain specified qualifications. The loan must have been taken out solely to pay education expenses and cannot be from a related person or made under a qualified employer plan. The student must be you, your spouse or dependent and enrolled at least half-time in a degree program. There are exceptions to this, so make sure to look into it further if you have questions.
Tuition and Fees Deduction: The tuition and fees deduction could reduce your amount of taxable ie by up to $4,000. This deduction can be used for qualified higher education expenses as long as you are eligible. This deduction cannot begin with any tax credits, so claim whichever gives you the most money back.
Business Deduction for Work-Related Education: You may be able to claim this deduction if you are an employee who can itemize deductions. This deduction applies to work-related educational costs and has to meet one of the following two criteria: the education must either 1) be required by law or your work, or 2) improve skills needed for your current line of work. However, if the education is needed to meet the minimum requirements of a current position or can qualify you for a new business or trade, then you cannot claim a work-related deduction.
American Opportunity Credit: This credit worth up to $2500 can be applied to all four years of college as long as the money was spent on qualified tuition and related expenses. This includes any supplies that are required by courses. This credit was added to supplement the Hope credit, which only applies to students first two years.
Hope Credit: The hope credit is for payment of the first two years of tuition and related expenses, generally for 2008 and earlier. This was the predecessor to the American Opportunity Credit and offers less assistance as it is not applicable to all four years of tuition.
Lifetime Learning Credit: The lifetime learning credit can be claimed for a deduction of up to $2,000 but cannot begin with any other education credit for the same student in the same year. This credit is most useful for students not in a degree program taking supplementary classes.
For more detailed information on any of the previous items, please consult Publication 970 from the IRS. This provides all of the information you need to determine qualification, as well as what forms you will need to file for each item.