Background Image - Foust Building

Tax Benefits for Higher Education Expenses

March 19, 2014 by Kelly Paul |
Kelly Paul
Tax

We all know, higher education can be expensive. So planning for it and maximizing opportunities to reduce the cost is important. Fortunately, the US government sponsors tax policies that can help take the bite out of the cost of that higher degree—for yourself, your spouse, or your kids. These policies affect four categories:

  • Tax credits
  • Tax deductions
  • Savings plans
  • Scholarships and fellowships

Tax credits are credits you can use to reduce the total amount of taxes you have to pay, once you figure out what those taxes are. Federal tax credits for education include the American Reinvestment and Recovery Act and the Lifetime Learning Credit. The ARRA credit can be claimed by single people paying for an education whose adjusted gross income is less than $80,000 or married couples making less than $160,000. The maximum credit is $2,500 per year for four years. The maximum Lifetime Learning Credit is $2,000.

Tax deductions are used to reduce the amount of your income that can be taxed. Deductible education expenses include (1) tuition and fees, (2) interest on student loans, (3) qualified student loans, and (4) qualified education expenses. Tuition and fee deductions may reduce your taxable income by as much as $4,000 and the student loan interest deduction by as much as $2,500.

These categories can overlap and are often confusing. For example, the student loan interest can only be deducted in so far as the student loan itself covered qualified education expenses (tuition and fees, room and board, etc.). So be sure to check specifics on the expenses you’re hoping to deduct.

Some deductions are also available if you are employed and your education is work-related. Be sure to check these out at http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center

Savings plans. The government sponsors two education savings plans that can help you save on taxes. These include state-sponsored 529 plans. Many families use 529 plans to save for a child’s college education. Though your CONTRIBUTION to the plan is not tax-deductible, DISTRIBUTIONS to the student are, as long as the student uses them to pay qualified higher education expenses.

Coverdell Education Savings Accounts were also set up as an incentive to help parents and students save for education. One difference is that they can be used to pay for K-12 education.  Also, you cannot contribute more than $2,000 to the plan in any given year. The balance grows tax-free until distributed. The student (beneficiary) will not owe taxes on the distributions if the distributions are less than the student’s qualified education expenses at an approved institution. For more info on Coverdell Education Savings Accounts, see Tax Tip 2008-59.

Scholarships and Fellowships. A scholarship or fellowship you receive to further your education is tax free only if: (1) your are a candidate for a degree at an eligible institution and (2) you use the money to pay for qualified education expenses.

The table below gives further information on these categories as well as links to further information. 

TAX CREDITS: These directly reduce the amount of taxes you have to pay. Currently, there are two major tax credits students may be eligible for.

American Reinvestment and Recovery Act (ARRA) (revamped)

  • Who can claim: paying parents or students.
  • Good through 2017.
  • Now available to a broader range of taxpayers, including those with higher incomes or who owe no income tax.
  • Can be claimed for 4 years of post-secondary ed instead of 2.
  • Cost of course materials also eligible.
  • Max credit: $2,500 per student per year.
  • Modified adjusted gross income must be $80,000 or less for singles, or $160,000 or less for married couples.

Check out these two links:

 

Lifetime Learning Credit

  • Who can claim: Parents or students—whoever  pays eligible higher ed expenses; can apply to self or eligible student, spouse or other dependent.
  • Can claim a lifetime learning credit of up to $2,000 for education expenses for ALL students enrolled in eligible institutions.
  • HOWEVER, can’t claim both this and ARRA credit for same student in same year.
  • If eligible, can claim this for one student and ARRA for different student in same year.
  • Esp. helpful to grad students, students taking one course, or not pursuing a degree.

DEDUCTIONS: These are deductions you can use to adjust/reduce your taxable income before figuring your final income tax. There are several.

Tuition and Fee Deductions

  • May be able to deduct qualified education expenses (tuition and fees) paid for yourself, spouse, or dependent.
  • Can reduce income up to $4,000.
  • Use Form 8917, Tuition and Fees Deduction; can use even if you don’t itemize on Schedule A (Form 1040).
  • May use in place of Lifetime Learning Credit if your income is too high.
  • Check disqualifiers.
  • Student activity fees, textbooks, supplies and equipment covered ONLY if these must be paid to the institution as a condition of enrollment/attendance.

 

Student Loan Interest Deduction

Qualified Student Loan

  • Loan taken out solely to pay for qualified education expenses for yourself, spouse or a dependent.
  • Paid or incurred within a reasonable time before or after you took out the loan.
  • Education provided during an academic period for an eligible student.
  • Does not cover a loan from a related person or a qualified employer plan.

 

 

Qualified Education Expenses

(for Student Loan Interest Deduction)

Expenses = total costs of attending an eligible ed institution, include grad school.

  • Tuition and fees
  • Room and board
  • Books, supplies, and equipment
  • Other necessary expenses (such as transportation)

See qualifiers for cost of room and board at

http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.

Business Deduction for Work-Related Education

  • If you are an employee OR self-employed paying for work-related education, you may be able to deduct the expenses for your work-related education.
  • These expenses may also qualify you for other tax benefits such as the tuition and fees deduction or life-time learning credit.
  • Education you need to meet the MINIMUM educational requirements for your trade or business does not qualify.
  • For further details, see Business Deduction for Work-Related Education and Qualifying Work-Related Education at http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.

 

 

 



OTHER POSSIBLE TAX BENEFITS: Savings plan distributions and scholarships/fellowships may be tax free if they meet certain conditions.

Savings Plans

  • States sponsor 529 Plans (for the IRS Code 529) to help taxpayers save for someone’s education, usually a child’s. Distributions remain tax free as long as they pay qualified higher ed expenses for a designated student.
  • Computer technology and equipment used primarily for educational purposes may qualify as an expense.
  • Coverdell Education Savings Accounts are similar to 529s, except they can be used for K-12 expenses. Some income limits apply. Total contributions cannot exceed $2,000 per year.
  • No taxes on distributions as long as they are less than the beneficiary’s qualified educational expenses for the time period.
  • For more info, seehttp://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.

 

Scholarships and Fellowships

  • A scholarship or fellowship is ONLYtax free if you (1) are a candidate for a degree at an eligible educational institution and (2) you use the scholarship or fellowship to pay for qualified educational expenses.
  • Qualified expenses include (1) tuition and fees and (2) fees, books, supplies, and equipment required for courses.
  • Other expenses, such as room and board, do not qualify.
  • For more info see Pub. 970 andhttp://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.  

By: Coventry Kessler

Image courtesy of Grant Cochrane at FreeDigitalPhotos.net.

Download Guide to Online Programs