There’s no mistaking: the cost of higher education is steadily on the rise. According to a recent report by the College Board, for the 2016 – 2017 academic year, the average student paid more than $24,610 in costs associated with higher education for in-state public college and $49,320 at private colleges. As the cost of education has become too much for many, adult part-time and full-time students need all the help they can get. The good news is that the IRS does help students get relief from some of these costs in the form of education tax credits and deductions. A tax credit on full time student taxes reduces the amount of income tax you owe, while a deduction reduces the amount of taxable income you have.
Both the American Opportunity Tax Credit and the Lifetime Learning Credit provide full-time students with powerful cost savings as part of their year-end tax return.
Claiming IRS Full Time Student Credits
There are currently two education tax credits offered by the IRS: the American Opportunity Tax Credit and the Lifetime Learning Credit. Both reduce the amount of taxes you owe when you file your taxes and, if your tax obligation is reduced to less than zero, you may receive a refund. Although other rules are in place for determining eligibility such as income thresholds, in order to qualify for either credit, you must first meet three criteria. The first criteria is that you, a third party or a dependent is paying for qualifying expenses related to education. The next requirement is that you must be an eligible student enrolled in an eligible institution of higher learning. And lastly, the eligible student must be you, your spouse or a dependent listed on your tax return. As part of the eligibility, you typically must fit the IRS full time student definition. If you find yourself eligible for both tax credits in the same tax year, you must choose which credit you wish to claim as the IRS does not allow for claiming both.
The American Opportunity Tax Credit, which modifies the Hope Act and was slated to end in 2012, was extended through to December 2017 – so you can still claim this credit for the 2017 tax year up to a limit of two years. This tax credit is a maximum of $2,500 for those who match IRS full time student eligibility guidelines and gives assistance with necessities like school supplies, books or any equipment needed in the course of your studies, but cannot be used for tuition. Check the IRS website to see all eligibility requirements and income thresholds for this credit.
There is also the Lifetime Learning Credit. The LLC helps offset qualified tuition and expenses related to pursuing higher education. Unlike the American Opportunity Tax Credit, there are no limit restrictions to the number of years you're allowed to claim this credit, and you may be eligible for up to $2,000 in credit per tax return. It also can be used for courses related to obtaining or improving job skills as well as for undergraduate, graduate and postgraduate courses. The IRS website has FAQs, tax credit comparison charts and other helpful information that can help you decide which tax break for college students is best for you.
Utilizing Your Deductions
If you are self-employed, you also might be eligible to deduct qualifying educational expenses directly from self-employment income. This will not only reduce the amount of income you'll be taxed on, it will also reduce your self-employment tax, as well. If you're unsure of whether you're eligible for these deductions or credits, visit a qualified tax professional and familiarize yourself with the IRS website.
The IRS also allows for some deductions you can use to reduce the amount of income on which you pay tax. If your modified adjusted income is less than $80,000 when filing singly or $160,000 if filing jointly, you might be able claim a student tax exemption deduction for paying interest on your student loan. If you qualify, you can reduce up to $2,500 of your income that is subject to tax. If you're an employee itemizing your deductions, you may qualify for claiming a deduction on any work-related educational expenses you are responsible for.
Completing Your Filing
You can use IRS Form 1040 in order to claim the majority of the deductions and credits available to you as a student. If you have any questions about how to properly file this form, it is strongly recommended that you consult with a CPA who can help ensure that you make the most appropriate decisions for your financial status.
- IRS: Tax Benefits for Education – Information Center
- College Data: What's the Price Tag for a College Education?
- IRS: Education Credits
- Turbo Tax: What is the American Opportunity Tax Credit?
- IRS: LLC
- IRS: Education Credits – AOTC and LLC
- Turbo Tax: What is a 1098-E: Student Loan Interest
- Internal Revenue Service. "Lifetime Learning Credit." Accessed March 5, 2020.
- Internal Revenue Service. "American Opportunity Tax Credit." Accessed March 5, 2020.
- Internal Revenue Service. "Education Credits: Questions and Answers." Accessed March 5, 2020.
- Internal Revenue Service. "Am I Eligible to Claim an Education Credit?" Accessed March 5, 2020.
- Internal Revenue Service. "Form 1098-T (2020): Tuition Statement," Page 1. Accessed March 6, 2020.
- SEC.gov. "An Introduction to 529 Plans." Accessed March 6, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.