The Internal Revenue Service permits tax deductions for qualified education expenses of eligible individuals or their dependents. The American Opportunity Tax Credit provides a benefit for those funding elementary or secondary schools for their children. There is also a deduction for educators of kindergarten through 12th grade. The Internal Revenue Service allows them to deduct up to $250 per year for out-of-pocket expenses. Tax benefits primarily extend from the provision to those seeking to continue their education after high school.
Taxpayers claiming tax deductions for qualified education expenses cannot file as married filing separately, be a dependent of another taxpayer or be a nonresident alien. The taxpayer, his spouse and dependents are eligible. The taxpayer cannot claim the American Opportunity Tax Credit or Lifetime Learning Credit in the same year. His modified adjusted gross income be below $80,000 ($160,000 for those whose status is married filing jointly). Modified adjusted gross income takes the amount on Line 37 of Form 1040 and re-adds some previous reductions.
The IRS deems tuition and related expenses for enrollment at nearly all accredited colleges and postsecondary schools as qualified education expenses. Including the costs of books, supplies and equipment is acceptable only if it is a condition of enrollment. Qualified expenses do not include room and board, medical expenses, insurance or transportation costs. A person borrowing funds to pay for college can still claim the deduction.
Amount of the Deduction
The deduction amounts are $4,000, $2,000 or zero depending on modified adjusted gross income. A taxpayer determines this amount by taking the adjusted gross income amount on Line 38 and adding back lines 34 and 35. If this sum is less than $65,000 and a taxpayer filing as single, head of household or qualifying widower, he is eligible for $4,000. If the total is between $65,001 and $80,000, he is eligible for $2,000. Above this is $0. For married filing jointly the amounts are less than $130,000, between $131,000 and $160,000, and about $160,000.
Tax Deduction Versus American Opportunity Tax Credit
A tax credit is sometimes more beneficial than a deduction. A deduction reduces the amount of taxable income prior to calculating tax liability. Producing tax liability happens by multiplying taxable income by the taxpayer's tax rate. So, a tax deduction of $1,000 will reduce a taxpayer's taxable income by only $250 if she is in the 25 percent bracket. However, a tax credit is a dollar-for-dollar reduction after calculating tax liability. A $1,000 tax credit reduces tax liability by $1,000 if the taxpayer owes.
- Internal Revenue Service: Publication 970, Tax Benefits For Education
- "Income Tax Planning for Financial Planners"; Thomas Langdon, E. Vance Grange, Michael Dalton; 2011