8 Tax Benefits for Students

Education is expensive. That’s why you want to make sure you get the most out of your money. We did our homework to present you with 8 tax benefits for students.

Tax Benefits for Students

When it comes to education, the costs can be high. Whether it’s private high school for your kids or a master’s degree in your field, those classes can cost a lot. Luckily, the government likes to encourage people to invest in education. And one way that they do that is through tax benefits for students. Here, we’ll give you a quick list of the tax benefits that are available for students–from K-12 all the way through graduate students.

1. Coverdell ESA

The Coverdell Education Savings Account is a way to save money for any type of education–from elementary school to secondary school to higher education. Contributors to this account are subject to income limitations, and the total contributions to the account can’t exceed $2,000 in any given year.

You don’t get any tax breaks when you contribute to a Coverdell. But the money grows tax-free until it’s distributed. Over time, that can result in a significant savings. The beneficiary will never pay taxes on the distributions if they are used for qualified expenses for educational purposes.

The Coverdell isn’t going to make or break your ability to pay for college with its limited tax benefit. But if you start saving when you baby is born, you could see significant tax-free growth in this account by college. Just be sure you’re aware of the income limitations when you contribute, and ensure that the distributions are used for qualified educational expenses.

2. College 529 Account

These plans are run at the state level, but they offer federal tax benefits. And, in most states, a College 529 also offers state tax benefits–sometimes significant. As with the Coverdell, contributions to a 529 aren’t tax-free at the federal level. Many states offer tax benefits when their residents contribute to a state-run plan, though.

However, the money does grow tax-free, so long as it’s used for qualified educational expenses. Recent changes to federal tax law changed 529s so that they can now be used to pay for tuition at private K-12 schools. However, states aren’t sure how they are handling these changes as of yet, so be sure to consult with a state tax expert if you plan to use a 529 for elementary or secondary educational expenses.

You’re still perfectly fine to use a 529 to save for college, though. And the funds can be used for any type of higher education, including post-bachelors work and career-related courses.

3. American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a dollar-for-dollar, partially refundable tax credit you can get when you pay qualified educational expenses. You can claim up to $2,500 in credit per year. If you don’t owe any taxes, you can get 40% of the remaining credit–up to $1,000–refunded to you.

To qualify for the AOTC, you must:

  • Be pursuing a degree or another recognized educational credential
  • Be enrolled at least half time for a minimum of one academic period beginning in the tax year
  • Still need to complete your first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

Since this credit is at least partially refundable, it could mean money back in your pocket during tax time!

4. Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is a more flexible option for getting a tax write-off for educational expenses. You can use it if you’ve paid for undergraduate, graduate, or professional degree courses. It even applies if you’re paying for courses just to improve or gain job skills. And you can get this credit for any number of years. The non-refundable credit is for up to $2,000 per tax return.

One thing to note about the LLC: you can claim the credit for expenses you paid for yourself or your spouse, or for expenses you paid for a dependent. And while you don’t necessarily have to be enrolled in a degree program, you do need to be enrolled in an eligible educational institution.

5. Tuition and Fees Deduction

Deductions aren’t as valuable as credits, since they don’t reduce your taxes owed on a dollar-for-dollar basis. But they’re still worth taking. The tuition and fees deduction lets you deduct the money you paid for eligible education expenses for yourself, your spouse, or a dependent during the tax year. The expenses must be for higher education.

You can claim up to $4,000 for this deduction each year. The deduction goes on Form 8917.

Note that in February 2018, Congress extended this deduction through the 2017 tax year, but it hasn’t been extended for the 2018 tax year yet. If you paid for tuition and fees in 2018, check the latest on the IRS website before you apply for this deduction when filing your taxes in 2019.

6. Student Loan Interest Deduction

Already paying interest on student loans? You can deduct that interest paid from your taxes as long as your modified adjusted gross income is less than $80,000 (or $160,000 if you’re filing a joint return). Keep in mind that this is only for interest you actually pay. So if you’re not yet paying on your student loans, you won’t be able to take this deduction. You can claim up to $2,500 per year for this deduction.

7. Business Deductions for Work-Related Education

If you’re an employee who paid for certain types of education expenses and you itemize your deduction, you may be able to deduct expenses for job-related education. If you’re an employee, you can only claim the deduction if your education-related expenses exceeded 2% of your income for the year.

So if you made $100,000 and spend $2,500 on work-related education, you can deduct $500 of those expenses if you itemize your deductions.

If you’re self-employed, qualified work-related education expenses simply count as deductions from your self-employment income.

Qualifying work-related education is strict, though. You have to be working, and the education in question must meet at least one of these two tests:

  • Your employer or the law require you to pursue this education to keep your current salary, status, or job. It must serve a true purpose for your employer.
  • It maintains a skill you need in your current work.

If the education is necessary to meet the minimum requirements of your current trade or business or if it’s part of a program of study that will qualify you for a new trade or business, it doesn’t count. In other words, if you’re levelling up your career, you’re out of luck for this expense. But if you need to take courses to maintain skills for your current job, you might qualify.

8. Tax-Free Benefits for Education

Some tax benefits for students aren’t credits or deductions. Instead, they’re types of educational assistance that are excluded from your income. So you can pay for education with these types of assistance, but you don’t have to claim that money as part of your income. So that will ultimately reduce your taxable income and your taxes.

Employer-Provided Educational Assistance

If your employer gave you up to $5,250 per year in educational assistance, you don’t have to claim that money as income. The plan must meet certain qualifications, including being a written plan available to employees. If your employer pays for more than $5,250 in educational expenses in a year, the excess counts as taxable income.

Educator Expense Deduction

If you’re an educator, you can deduct up to $250 of unreimbursed expenses. This deduction includes things like books, supplies, computer equipment, professional development courses, and other classroom supplies.

A Caveat: No Double Dipping

One thing to keep in mind is that, just like anything else in the tax world, you can’t claim the same expenses in more than one way. In other words, you can’t take both the American Opportunity Tax Credit and the tuition and fees deduction in the same year. You’ll have to pick one. Usually the credit will be more beneficial, but it helps to look at both to be sure.

Topics: Taxes

2 Responses to “8 Tax Benefits for Students”

  1. Recommend revisiting listing of the “Tuition and Fees Deduction” in this article. With this article being published on December 5th and included in the December 8th Dough Roller newsletter, a reader would expect that you are writing about tax benefits for calendar year 2018. However, this “Tuition and Fees Deduction” was last extended by Congress for 2017 only. Per the IRS website, “Per the Bipartisan Budget Act of 2018, signed into law Feb. 9, 2018, the Tuition and Fees Deduction has been extended for tax year 2017.” Do you know of legislation that is expecting to extend this again for 2018?

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