Tax Deductions and Credits for Education | 02.17.11

Posted in Financial Aid, financial aid tips, Student Loans By Student Loan Network Staff

Money and TasselWith 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 a dependent (for tax purposes), only one may claim a credit or 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 income, 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.

Tax Deductions

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 income by up to $4,000. This deduction can be used for qualified higher education expenses as long as you are eligible. This deduction cannot be combined 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.

Tax Credits

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 a student’s 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 ($4,000 in some instances) but cannot be combined 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.

This is part two of a blog on tax and loan related information. Read part one, To Claim or not to Claim: College Loans and Taxes for more information on claiming student aid.


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4 Responses to “Tax Deductions and Credits for Education”

  1. Andrew P. Chandler says on December 9, 2011 at 4:35 am:

    This was very informative. I would like to know if I am receiving unemployment and financial aid (pell grant), how do I deal with taxes so I can have both without repercussions?

    Reply To This Comment
  2. Jumbo Mortgages says on April 7, 2011 at 4:40 am:

    The information you have shared is very informative! I also share this information with my friends by Face book…

    Reply To This Comment
  3. allyson o'connor says on March 16, 2011 at 9:27 pm:

    the article was very interesting. i liked it

    Reply To This Comment
  4. Kristin Barnes says on March 15, 2011 at 7:19 pm:

    This information was very helpful i now know more about tax credits and deductions.

    Reply To This Comment

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