Two Education Credits Help Taxpayers With College Costs
IRS Tax Tip 2019-125, September 11, 2019
With school back in session, parents and students should look into tax credits that can help with the cost of higher education. They do this by reducing the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may get a refund.
Taxpayers who pay for higher education in 2019 can see these tax savings when they file their tax returns next year. If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.
There are two credits available to help taxpayers offset the costs of higher education. The American opportunity tax credit and the lifetime learning credit may reduce the amount of income tax owed. Taxpayers use Form 8863, Education Credits, to claim the credits.
To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution.
The American opportunity tax credit is:
- Worth a maximum benefit up to $2,500 per eligible student.
- Only for the first four years at an eligible college or vocational school.
- For students pursuing a degree or other recognized education credential.
- Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.
The lifetime learning credit is:
How To Claim The Tuition And Fees Deduction In 2020
For the 2018, 2019 and 2020 tax years, taxpayers must meet the following income requirements to be eligible for the Tuition and Fees Deduction:
- Taxpayers with a modified adjusted gross income of $65,000 or less may claim a maximum $4,000 deduction.
- Taxpayers with a modified adjusted gross income between $65,001 and $80,000 may claim a maximum $2,000 deduction.
- The income phaseouts for the Tuition and Fees Deduction do not change. They are not adjusted annually for inflation like income phaseouts that apply to other tax benefits.
Tuition and Fees Deduction cannot be claimed if American Opportunity Tax Credit or Lifetime Learning Tax Credit are claimed for the same student during the same tax year. A taxpayer may claim the Tuition and Fees Deduction and take a qualified 529 plan distribution during the same tax year for the same student, but there is no double-dipping.
Any amount of other tax-free educational assistance, such as scholarships, employer-provided educational assistance and veterans educational assistance received during the current year must be subtracted from the students qualified education expenses that are eligible for the Tuition and Fees Deduction.
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Nys College Tuition Tax Credit/deduction
You can take either a New York State tax credit or an itemized tax deduction for allowable college tuition expenses. The expenses must be for undergraduate study, paid by you as a taxpayer, on behalf of yourself, your spouse, or your dependents, to enroll or attend qualifying in- or out-of-state institutions of higher education.
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Student Loan Tax Deduction
If you take out student loans to pay for college, the debts can help you on your taxes in two ways. First, tuition paid with loans still qualifies for the various tax breaks for tuition. Second, as you repay the loan, you might qualify for the student loan interest deduction. This deduction allows you to reduce your taxable income by up to $2,500 per year. To qualify for the deduction, the interest deducted must be paid during the year, you cant file as married filing separately, you and your spouse cant be claimed as a dependent by another taxpayer and your modified adjusted gross income cant exceed the annual limits.
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It Allows You To Maintain Or Improve Your Job Skills
Over time, there are updates to the tools, software, and processes you use to do your work. To stay competitive, you need to maintain your level of skill — and improve on what you already offer.
Training that helps you do this is tax-deductible. That goes for classes and self-study programs.
For example, say you pay for a class that walks you through massive updates to the software you use to provide design services. That counts as maintaining your skills.
Another example: if you take a class for a new program you want to start using for your design work, that counts as improving your skills.
Either way, the IRS will recognize your class as a deductible business expense.
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Irs Forms Students & Their Families May Need
If you are a student yourself or a parent of a student, youre probably wondering what forms youll need to file your taxes. Here are the forms you may need to start:
- Replacing the 1040EZ, this is the new, simple income tax return form for seniors.
- Form 1040AThis is more complicated than Form 1040SR but less complex than Form 1040. You can claim education credits using this form.
- Form 1040This is a more complex version of the Individual Income Tax Return. You can take all credits and deductions you qualify for when using this form.
- Form 8863Use this form if you qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit
- Form 8917Use this form to calculate the tuition and fees deduction
To fill out the tax forms listed above, youll need information others will send you. This information normally arrives on the official tax forms listed here:
You Have The Right To Minimize Your Tax Liability
Understanding culinary schools impact on your taxes is an important piece of the overall financial picture youll need to consider when making the decision to pursue education. Deductions and credits can be confusing, but you have the right to take every eligible step to minimize your tax bill.
A tax accountant is the right person to ask about your specific circumstances and eligibility. Even if you cant get one of these credits, someone who specializes in taxes may be able to help to minimize your tax liability and maximize the money you get to keep in your pocket. For questions about paying for culinary school, our Financial Advisors can help. Contact us for more information about tuition, financial aid, and scholarship opportunities!
To learn more about the financial side of education, try these resources next:
*This information may not reflect every student’s experience. Results and outcomes may be based on several factors such as geographical region or previous experience.
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Tax Credits Vs Tax Deductions: Whats The Difference
- A tax credit is a simple reduction of the income tax you owe. If your federal tax bill is $1,000 and you receive a $1,000 tax credit, your net tax bill will be $0. Some tax credits are refundable. This means you will receive the full amount of the credit even if its more than what you owe on your tax bill. So if your federal tax bill is $700 and you receive a $1,000 tax credit, you will receive a $300 tax refund.
- A tax deduction is a reduction in your total taxable income for the year. For example, if you earned $50,000 in income for the year and had $5,000 in tax deductions, you would only have to pay taxes on $45,000 of income.
Higher Education Tax Credits
There are two college tax credits you can potentially claim: the American Opportunity Tax Credit and the Lifetime Learning Credit. You can only use one, so choose the tax credit that will save you the most money on your 2016 taxes.
Typically, the American Opportunity Tax Credit is the way to go. The AOTC reduces your tax bill by up to $2,500 per eligible student. You can claim it every year that your dependent is an undergraduate, for up to four years, and college expenses such as books and equipment, as well as tuition, qualify for the write-off. But you cant claim the credit if your adjusted gross income was over $180,000 in 2016 and youre married, filing jointly or if it was over $90,000 and you were single.
If you dont qualify for the AOTC, you may still be eligible for the Lifetime Learning Credit. This credit could reduce your taxes by up to $2,000 on your return. You can claim it for an undergrad or a grad student under age 24. But your 2016 adjusted gross income must have been no more than $131,000 if you were married and filing jointly up to $65,000 if you were single.
If you e-file your taxes with a service such as TurboTax or Jackson Hewitt, the firm should automatically check whether you qualify for these college credits. Then, the tax prep company will suggest which one will give you the better tax break.
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What Expenses Dont Qualify As Education Expenses
While they may be associated with your enrollment or college attendance, the following are not qualified expenses:
- Room and board
- Medical expenses, including student health fees
- Personal living or family expenses
- Non-credit courses, except if they are included in a degree program
- Classes that involve sports, games, or hobbies
- Expenses paid with tax-free scholarships or another tax-free award
The American Opportunity Tax Credit
The familiar Hope Credit has been replaced by the new and improved American Opportunity Credit. For your 2021 taxes, the American Opportunity Tax Credit:
- Can be claimed in amounts up to $2,500 per student, calculated as 100% of the first $2,000 in college costs and 25% of the next $2,000.
- May be used toward required course materials as well as tuition and fees.
- May be applied against four years of higher education .
Whats more, the new tax credit is available to more taxpayers than the Hope Credit. The full credit may be claimed by people with modified adjusted gross income of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. The credit is gradually reduced at higher income levels. Lower-income taxpayers also benefit because up to 40% of the credit is refundable, meaning that you can expect a check from the government if you owe no taxes.
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Is College Tuition Tax Deductible
College isnt cheap. However, depending on your situation, you might be eligible to deduct all or a portion of tuition costs when you file your taxes. But, because the tax code contains multiple education tax credits for higher education costs, you need to know how they work to make sure youre maximizing your tax breaks.
Can Parents Claim The Tuition And Fees Deduction
Lets say you have a son in college: You can only claim applicable education credits if you claim your son as a dependent. Your son can claim an education credit or deduct tuition for the expenses paid on his own return if hes eligible and wasnt a dependent of you or anyone else.
For you to claim the tuition you have to be eligible to claim your son as a dependent and have paid the expenses. If your son paid the expenses or you dont claim him, you cant take the tuition and fees deduction or another credit. Your son can use all eligible expenses for the Tuition and Fees Deduction or a credit if hes not an eligible dependent. This is true regardless of whether the student, the parent, or someone else paid the fees.
If you can claim your child as a dependent and he already filed his return as a non-dependent, hell need to file an amended return to show that hes a dependent. Hell need to use Form 1040X which he must mail to the IRS.
If you were entitled to claim your son as a dependent, but chose not to, he can claim the nonrefundable portion of the education credits. However, he cant claim the tuition and fees since you were entitled to claim it.
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Not Sure Which Credits To Take
If you prepare your taxes with TurboTax, well guide you to the credits and deductions that will give you the biggest tax breaks. Just answer some simple questions and well recommend the right credits for your situation.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
Can I Write Off College Tuition
The tuition and fees deduction allows you to write off up to $4,000 of qualified education expenses each year. Tuition you pay always counts as a qualified expense as long as youre paying it if its paid by a tax-free scholarship, grant or fellowship, those costs dont qualify for the tax deduction.
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Another Tax Break For Your Educational Expenses
You can’t always claim your education expenses as a business deduction. But there’s another tax break you might be able to claim.
Enter the Lifetime Learning Credit. You can use it to pay for courses at a college, university, or trade school.
The Lifetime Learning Credit is worth up to $2,000 per tax return. It comes with a gross income limit of $69,000 .
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Jesus Morales is an Enrolled Agent and has 7 years of bookkeeping and tax experience. He enjoys hiking, traveling, and studying tax law.
Scholarships Fellowships And Other Assistance
Many types of educational assistance are tax free if they meet certain requirements. For example, a scholarship or fellowship grant is excluded from taxable income if you’re a degree candidate at an eligible educational institution . The money must also be used for tuition or fees required for enrollment or attendance, or for books, supplies, equipment, or other expenses that are required for a class. It can’t exceed your education expenses be designated or earmarked for non-educational purposes or represent payment for teaching, research, or other services required as a condition for receiving the financial assistance.
Payments to veteran for education, training, or subsistence under any law administered by the Department of Veterans Affairs are also tax free. However, if you qualify for other education tax benefits, you may have to reduce the amount of education expenses qualifying for other tax benefits by any VA payments that are used for education expenses.
If your tuition is reduced because you or a relative works for a college, you might not have to pay tax on this benefit. . The rules for determining if a tuition reduction is tax free are different if the education provided is at the undergraduate or graduate level. If you receive a tuition reduction for undergraduate courses, its tax free only if you’re:
For graduate courses, a tuition reduction is tax free only for students who perform teaching or research activities for the college or university.
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The Lifetime Learning Credit
The maximum annual credit is $2,000, calculated as 20% of the first $10,000 in qualifying educational expenses. But there is no limit on the number of years of higher education for which you can claim it. As a result, although the American Opportunity Tax Credit yields a higher tax credit of up to $2,500 per student and is the best bet for most undergraduates, the Lifetime Learning Credit may be particularly helpful in reducing costs for graduate students or students who are taking post-secondary courses but not pursuing a degree.
Beginning in 2021, the income limits for the Lifetime Learning Credit are increased to be in line with those of the American Opportunity Tax Credit. The full credit may be claimed by people with modified adjusted gross income of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly.
Most parents will come out ahead with the more generous American Opportunity Credit.
Other Student Tax Tips
While available to any taxpayer, there are some tax credits that typically fit the student lifestyle. Consider these deductions and non-refundable credits when you complete your childs return:
- Moving expenses: Claim this if the student moved a substantial distance to continue studies, such as another city. You can only deduct these expenses from the part of your scholarships, fellowships, bursaries, certain prizes and research grants that are required to be included in your taxable income not from your total income.
- Child care expenses: These can be claimed when child care is required for the parent to attend classes.
- Interest paid on a student loan: Only the student can claim the interest amount on a student loan, regardless of who actually paid the interest. If the student doesnt need to claim the interest to reduce tax payable to zero, this amount can carry forward up to five years.
References & Resources
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Practical Tips To File Your Taxes
- A financial advisor can help you optimize your tax strategy to benefit your investment and retirement goals. Finding the right financial advisor that fits your needs doesnt have to be hard. SmartAssets free tool matches you with financial advisors in your area in 5 minutes. If youre ready to be matched with local advisors who can help you achieve your financial goals, get started now.
- Start gathering financial documents early. Set a deadline for when youll have your W-2 forms, 1099 forms, investment income information, last years tax refund, student loan interest and the rest of the items listed on the IRS Tax Form checklist. By breaking the intimidating task of filing your taxes into smaller chunks, you have a better chance of avoiding a last-minute marathon session to meet the filing deadline.
- Educate yourself as soon as possible about what you can and cant deduct from your taxes. It pays to know everything you can about how taxes impact your situation in order to maximize your tax return.