Tax Credits and Deductions for a College Education

If you were a college student, were paying off student loans, or had a child in college in 2012, remember to check for education-related deductions and credits when you file your taxes this year. The IRS names several available deductions and credits related to college expenses.

I’ll break down the options, so you can easily see if you’ll qualify for any of these valuable tax breaks.

First, a review

First, let’s look at the difference between a credit and a deduction because these tax breaks are divided into those two main categories.

A tax credit directly reduces the amount of income tax you have to pay. So if you owe the government $1,500 but qualify for a credit of $1,000, you’ll only owe $500. A refundable tax credit could mean the government owes you money. If you owe $1,500 but qualify for a $2,000 refundable credit, you’ll get a $500 check. A nonrefundable credit, on the other hand, will take your tax liability down to $0 but won’t put money back in your pocket.

A tax deduction will reduce your taxable income, which could reduce the amount of tax you have to pay.

Education-related credits

Credits are a better way to save than deductions, generally, because they reduce your tax liability dollar-for-dollar. So start by seeing if you qualify for any of these credits. If not, check out the deductions. You may be able to qualify for both for the best possible tax savings.

American Opportunity Credit

The American Opportunity Credit has temporarily replaced the Hope Credit, which usually applies to tax years 2008 and earlier. This credit was created through the American Recovery and Reinvestment Act.

  • How it works: The American Opportunity Credit can reduce your tax liability by quite a lot, and many Americans who paid for education in 2012 will be eligible for it. If you paid for education for yourself, your spouse, or one or more dependents in 2012, check out this credit.
  • Deduction limits: This credit can be used to reduce your tax liability by up to $2,500 per qualifying student.
  • Income limits: You can apply for this credit if your modified adjusted gross income was $80,000 or less in 2012 ($160,000 or less for married couples filing jointly). Even if your income is above those levels, you may be able to take a percentage of this credit to lower your taxes.
  • How it’s calculated: You can claim 100 percent of your first $2,000 of higher education expenses and 25 percent of the next $2,000. So if your income was less than $80,000 (or $160,000) and you paid $4,000 for one student’s educational expenses, you’ll qualify for the whole $2,500 credit. If your income is higher or your expenses were lower, you may still qualify for some.
  • Qualified student: This credit can be claimed if a student meets the following criteria:
    • Was (in 2012) enrolled in a post-secondary school (college, university, vocational school, etc.) and was working toward a degree or certification
    • Had not completed four years of post-secondary education by the beginning of 2012 (hint: you can deduct graduate school expenses in some circumstances!)
    • Carried at least half the normal course load for at least one academic period in 2012
    • Has not been convicted of a felony drug offense
  • Qualified expenses: This tax credit can be used for certain educational expenses for up to four years of education. The expenses include tuition and fees, as well as books, supplies and equipment necessary for schooling.
  • It’s refundable: Up to 40 percent of the credit can be given to you, even if your tax liability is $0. So even if you owe very little or nothing, claim this credit if you paid qualified educational expenses in 2012.

Lifetime Learning Credit

This credit is great because it can be claimed for as many years as you have educational expenses. However, you can’t claim both the American Opportunity Credit and the Lifetime Learning Credit for any one student in any one tax year. The first credit is generally better, so try it first.

  • How it works: You can claim this credit any number of years. If you’re going to school to further your current education, in graduate school, or just taking one class a semester, this is the credit for you.
  • Deduction limits: This credit is a non-refundable deduction for up to $2,000. Basically, you can claim 20 percent of up to $10,000 in educational expenses.  If your family had more than one spouse and/or dependent in college in 2012, you can add educational expenses from different individuals together to meet that $10,000 limit.
  • Income limits: To qualify for the full credit, your modified adjusted gross income for 2012 needs to be $52,000 or less ($104,00 or less if filing jointly). For a partial credit, income limits are up to $62,000 ($124,000 if filing jointly).
  • Qualified student: Even if you only took one class, you can apply for this credit.
  • Qualified expenses: This credit can be used only for tuition and mandatory fees, not for other expenses like room and board or books. However, the credit can be claimed even if you paid for tuition with a student loan.

One thing to keep in mind with these two deductions: You can choose which deduction you take for which students. Let’s say, for example, that your family funded your spouse’s graduate school education, two continuing education courses for yourself, and your child’s undergraduate education in 2012.

If you meet the income limits for the American Opportunity Credit and your child is in her first four years of post-secondary education, you can claim that credit for your child’s expenses. Then, you can add yours and your spouse’s tuition and fees together to claim a deduction for the Lifetime Learning Credit.

If you’re still paying for your child’s education after her first four years, you can’t claim the American Opportunity Credit, but you can claim the Lifetime Learning Credit.

Education-related deductions

We’ll look at several deductions, some of which you can claim even if you’re a graduate, non-traditional or part-time student, and others you can claim just for paying student loans or brushing up on career-related knowledge and skills.

Tuition and Fees Deduction

You may be able to deduct certain qualified educational expenses you paid for yourself, your spouse or a dependent in 2012. This credit can get a little complicated because “educational expenses” can be interpreted broadly. Here’s what you need to know:

  • How it works: The tuition and fees deduction is claimed using Form 8917, and it’s considered an income adjustment. That means that you can take this deduction even if you take the standard deduction rather than itemizing.
  • Deduction limits: You can use this deduction to reduce your taxable income by up to $4,000.
  • Income limits: You can deduct only tuition and fees for higher education if your modified adjusted gross income (MAGI) is $80,000 or less for single filers or $160,000 or less if you’re filing a joint return.
  • Qualified student: Generally, you can use this deduction if you were enrolled in college and had educational expenses during 2012. You cannot take the deduction if you were a nonresident alien for any part of the year, and you can’t claim this deduction if another person also claims it. (i.e. if parents are separated, both cannot claim a deduction for the same educational expenses for the same child.)
  • Qualified expenses: Qualified expenses are generally any expenses you had to pay to make college happen, including necessary transportation expenses. Obviously, you can deduct tuition and mandatory fees, books, supplies and other necessary equipment.
  • A note on room and board: You can deduct room and board expenses for tax purposes. However, if you didn’t live on campus, you need to check your school’s official cost of attendance report. You can only take up to the allowance for room and board written into this report, which is used for federal financial aid purposes. If you lived in college-owned or -operated housing, you can deduct all your room and board expenses.

Student Loan Interest Deduction

This is one of the few cases in which you can deduct interest paid during the previous year. If you paid on student loans for yourself, a spouse or a dependent in 2012, be sure to look into this deduction.

  • How it works: Your student loan company should send you (or give you online access to) a statement showing how much you paid in student loan interest in 2012. If you are paying on student loans through multiple lenders, make sure you get all your statements before filing. This deduction can be used even if you aren’t itemizing your taxes.
  • Deduction limits: The student loan interest deduction can only be used to reduce your taxable income by up to $2,500.
  • Income limits: You can deduct student loan interest if your modified adjusted gross income was less than $75,000 (or $150,000 if you’re filing a joint return) in 2012.
  • Qualified student loan: This deduction works for interest paid on student loans that were used solely to pay for qualified educational expenses (see above for more about qualified expenses). The loan needs to have been for yourself, your spouse or someone who was a dependent when you took out the loan. In other words, parents/guardians can claim this deduction for interest paid on a student loan used for a child’s educational expenses, even if that child is no longer a dependent.
  • What doesn’t qualify: If you took out a school loan from rich old Aunt Betty, you’re out of luck. Even if you’re paying her back with interest, you can’t deduct interest paid on a loan from a relative. Also, you can’t use this deduction if you’re paying for a student loan through your employer.

Work-Related Education Deduction

If you thought you were out of luck once you finished your bachelor’s and got a full-time job, think again. If you’re planning to itemize your tax deductions, you may be able to use work-related educational expenses to lower your taxable income.

  • How it works: Work-related educational expenses are rolled in with the larger “business deduction” category. You can only claim a business deduction, though, for business-related education, job and certain other expenses that exceed 2 percent of your adjusted gross income.
  • How to claim it: If you’re employed by someone else, add your qualified education expenses to your other business expenses, and take it as a business deduction. If you’re self-employed, qualified educational expenses can be deducted directly from your self-employment income. If you’re employed, you’ll fill out Schedule A on Form 1040 or 1040NR, and if you’re self-employed, you’ll file Schedule C, Schedule C-EZ, or Schedule F.
  • Qualified expenses: Work-related education is only deductible if it is either required by your employer to keep your current salary or job or if it helps you improve or maintain skills that you need in your job right now. Academic, vocational and refresher courses, as well as some seminars and classes on current developments in your field, could all be fair game.
  • Non-qualified expenses: Educational expenses don’t qualify if you paid for education to meet the bare minimum educational requirements for your job or business, or if the expenses were for an education that will launch you into a new business or career field.

Other ways to save

Whether you paid for a college education in 2012 or not, there are some other ways to cut your tax liability this year and possibly in future years. State-sponsored 529 plans and Coverdell Education Savings Accounts are good ways to grow education savings tax-free until college. Plus, some states allow income tax deductions when you put money into accounts like these.

Speaking of state deductions, it’s important to see if your educational expenses are deductible on your state taxes, whether or not they were deductible on your federal taxes. In New York, for instance, you can deduct a percentage of certain undergraduate expenses – even if you, your spouse or your dependent attended an out-of-state school.

The important thing, when it comes to saving on your taxes, is to check out every possible avenue of savings. Will you qualify for any educational tax credits or deductions this year?

Published or Updated: April 21, 2014
About Abby Hayes

Abby is a freelance copywriter and blogger who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three.

Speak Your Mind

*