Tax Breaks for Education

By Alan L. Olsen
Managing Partner
Greenstein, Rogoff, Olsen & Co., LLP
Updated: 9/10/2012

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
For 2012, you can claim the Lifetime Learning Credit. This allows you to receive up to $2,000 for qualified tuition and related education expenses paid for a student enrolled in an eligible education institution. The related expenses can only be included if the fees are required to be paid to the school when you enroll. 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.” If you have paid your tuition with a loan, you still may qualify for the credit. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student. [2]

2. American Opportunity Credit
The American Opportunity Credit is available for 2012. It is a refundable credit for up to 40% of $2500 per student paid in tuition and other fees. This means that with this credit, you can receive a refund even if you do not owe taxes. 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 at an eligible institution. 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). The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing jointly. The credit is phased out for taxpayers with income above these levels. [3]

As you research which credit would be best for you to claim, be aware that you can claim only one type of education credit per student in the same tax year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

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 or $150,000 if filing a joint return. Qualified expenses for this deduction include tuition, qualified housing fees, course books, school supplies, equipment and transportation. The deduction can be taken by undergraduate and graduate students. [4]

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 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]

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.

[1] Table 283. US Census Bureau Statistical Abstract: 2011. Pg 182.
[2]Lifetime Learning Credit.
[3]American Opportunity Credit.
[4]Student Loan Interest Deduction.
[5]Tuition and Fees Deduction.
[6]Business Deduction for Work-Related Education.
[7]Tax Benefits for Education: Information Center.