Tax Breaks for Education

By Alan L. Olsen
Managing Partner
Greenstein, Rogoff, Olsen & Co., LLP
Posted: 6/27/11

The average price of post secondary education in the United States was $14,006 as of 2008[1]. For college students whose income is limited, if not nonexistent, expenses add up fast. Being aware of educational tax deductions and credits can help you to save quite a few dollars on your tax return.

As many explore what educational deductions or credits they can take, there may be confusion as to what expenses they can actually claim. The descriptions below should help you in better understanding what qualified expenses are for educational deductions and credits:

1. Lifetime Learning Credit
The Lifetime Learning Credit allows you to receive 20% of out of pocket expenses for qualified tuition and related expenses up to a maximum of $10,000. The maximum amount that you can claim for this credit is $2000. For this credit, you can receive a credit for qualified tuition and related expenses. The related expenses can only be included if the fees are required to be paid to the school when you enroll[2]. Course books, school supplies, equipment and fees for student activities may be deductible dependent upon the above condition. You cannot claim expenses that were used for “insurance, medical expenses, room and board, transportation, or personal, living, or family expenses[2].” If you have paid your tuition with a loan, you still may qualify for the credit.

2. American Opportunity Credit
The American Opportunity Credit is a refundable credit for up to 40% of $2500 paid in tuition and other fees. This means that with this credit, you can receive a refund even if you do not owe tax. The maximum refundable credit that you can receive for the American Opportunity Credit is $1000. This credit can be used to claim expenses for your first four years of post secondary education. The difference between this credit and the Lifetime Learning Credit is that educational expenses do not necessarily have to be paid to your school. Expenses include tuition, books, supplies and equipment, such as a computer (if required for attendance at your school)[3]. This credit has been extended until December 31, 2012.

3. Student Loan Interest Deduction
The Student Loan Interest Deduction is a deduction that can reduce your taxable income by up to $2,500. It can be taken by individuals whose Modified Adjusted Gross Income (MAGI) is less than $75,000 if you are single. Qualified expenses for this deduction include tuition, qualified housing fees, course books, school supplies, equipment and transportation[4]. The deduction can be taken by undergraduate and graduate students.

4. Tuition and Fees Deduction
The Tuition and Fees Deduction can reduce your taxable income by $4000. For this deduction your MAGI must be less than $80,000 if you are single. For this deduction, you can deduct qualified tuition and related expenses if the expenses are paid to the school as a requirement for enrollment. For example, qualified expenses could include books, school supplies, equipment and activity fees. If you purchase your course books from a the college bookstore, but they were not required for your initial enrollment in the school, the books are not a qualified expense[5].

5. Business Deduction for Work-Related Education
The Business Deduction for Work-Related Expenses is available to individuals who are working and need to take additional education courses for their current job. There are several qualifications that you must meet to take this deduction. Some of the qualifications include the need to be working currently and itemize your deductions on Schedule A. Qualified expenses include “tuition, books, supplies, lab fees, and similar items, certain transportation and travel costs, other education expenses, such as costs of research and typing when writing a paper as part of an educational program[6].”

As you research what deductions or credits would be best for you to claim, be aware that you cannot double claim your expenses in the same tax year. For example, you cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same expenses.

There are many opportunities to save money in college through tax savings. Consult with a qualified professional to determine what option would be best for you.

Sources:
[1] Table 283. US Census Bureau Statistical Abstract: 2011. Pg 182. http://www.census.gov/compendia/statab/2011/tables/11s0283.pdf
[2]Lifetime Learning Credit. http://www.irs.gov/publications/p970/ch03.html
[3]American Opportunity Credit: Questions and Answers. http://www.irs.gov/newsroom/article/0,,id=211309,00.html
[4]Student Loan Interest Deduction. http://www.irs.gov/publications/p970/ch04.html
[5]Tuition and Fees Deduction. http://www.irs.gov/publications/p970/ch06.html#en_US_2010_publink1000178321
[6]Business Deduction for Work-Related Education. http://www.irs.gov/publications/p970/ch12.html