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Education, and higher education in particular, comes at a high cost, there’s no doubt about that. In the most recent survey of college pricing, reports show that a moderate college budget for an in-state public college for the 2016– 2017 academic year averaged $24,610, and a moderate budget at a private college averaged $49,320. College expenses may include tuition and fees, housing and meals, books and school supplies, personal and transportation expenses.
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From the taxation point of view, there is good news for those of you paying for education for themselves or others: there are certain education tax credits and deductions available to you.
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This newsletter is intended to give you the basic information on the tax credits, deductions and savings plans that can help you with your expenses for furthering education.
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- An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American opportunity tax credit and the lifetime learning credit.
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The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education.You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
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The Lifetime Learning Credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses-- including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
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| There are additional rules that apply for each credit, but you must meet all three of the following for either credit: |
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- You, your dependent or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse or a dependent you list on your tax return.
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| If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. |
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You can't claim the AOTC if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes.
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The law requires that both you and your qualifying student have a valid Social Security number or Individual Taxpayer Identification Number, issued before the due date for your tax return, in order to claim the AOTC.
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Tuition and Fees Deduction
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| You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education. |
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| The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you don’t qualify for the American opportunity or lifetime learning credits. |
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| You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax. You cannot claim the tuition and fees deduction as well as an education credit for the same expense. |
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| Student Loan Interest Deduction |
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| Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments. |
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| This deduction can reduce the amount of your income subject to tax by up to $2,500 for tax years 2016 and 2017. The student loan interest deduction is taken as an adjustment to income, which means you can claim this deduction even if you do not itemize deductions on Schedule A. |
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| Business Deduction for Work-Related Education |
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| If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax. |
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If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax.
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Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity credit, tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above. You cannot claim this deduction as well as the tuition and fees deduction for the same expense, nor can you claim this deduction as well as an education credit for the same expense.
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States may establish and maintain Qualified Tuition Programs (QTP), also referred to as section 529 plans, that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. If you prepay tuition, the student
(designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You can't deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it.
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No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Qualified expenses include required tuition and fees, books, supplies and equipment including computer or peripheral equipment, computer software and internet access and related services if used primarily by the student enrolled at an eligible education institution. Someone who is at least a half-time student, room and board may also qualify.
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A Coverdell Education Savings Account (Coverdell ESA) can be used to pay either qualified higher education expenses or qualified elementary and secondary education expenses. Income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
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| Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses. |
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| You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit. |
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| If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. |
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| If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income. However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. |
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A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense.
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| As you already know, advice from a tax professional can be of great help in determining which of the tax benefits above is the most suitable for your particular situation in the pursuit of higher education for yourself or those closest to you. |
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