The Daily Deduction

Tips For Taxpayers with Education Expenses

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Education has often been seen as an investment for long-term benefits such as the ability to secure a lucrative career, advancement in society, and the means by which to gain a valuable skill-set. Additionally, education can also help people save on their taxes every year, at least in terms of money spent on higher education.

Tax Credits Available

The federal government and many states offer what are known as tax credits. Unlike deductions, which allow a taxpayer to use a percentage of certain costs against taxes owed, tax credits allow a dollar-for-dollar full savings of credit expenses against taxes owed. That makes them far more valuable as a tax strategy.

The federal government by law provides for education tax credits, which essentially reduce a person’s income taxes in the same year education costs are paid. On a cash basis, that puts money back in a person’s pocket for going to school.

The American Opportunity Tax Credit

Slated to end in 2012, the American Opportunity tax credit was extended until December 2017. As a result, taxpayers who go to college, whether they earn higher income or owe no taxes at all, can claim annual education credits of $2,500 per student. This includes costs for books, course materials, and extends to costs at four-year schools instead of two-year schools. Further, taxpayers earning less than $80,000/year as an individual or $160,000 as a married couple can claim the credit, providing more access. Above these figures the credit phases out until it reaches $0. More information about these changes can be referenced in the IRS notice IR-2009-78  -Special IRS Web Section Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available.

The Lifetime Learning Credit

Available to all types of secondary school students, the Lifetime Learning tax credit can be used for both job skill upgrading as well as regular education. It doesn’t matter how many years a person already has had in college.

Tuition and Fees Deduction

For those who don’t qualify for the above tax credits, taxpayers can still claim a deduction for tuition and fees paid. This only works if a person itemizes his tax deductions versus taking the standard deduction. Where it applies, a percentage of school costs can then be used to reduce taxable income in a year, potentially reduces taxes owed by a partial amount.

Other Tax Options

For those not yet ready to go to school but who don’t want to pay taxes on money being saved a 529 college savings plan is a valuable option. Money can be deposited and invested for one’s own education or that of another, such as a child. When the funds are withdrawn, they can be used entirely for higher education without penalty or taxes. If they are withdrawn for something else, however, taxes apply.

Last Notes

People cannot claim the American Opportunity and Lifetime Learning education credits at the same time on the same student, regardless of different expenses. Further, none of the tax credits apply if the tax deduction is used in the same year for the same student as well. All expenses used have to be associated with post-secondary tuition and related costs for either a taxpayer, a spouse, or a dependent. If claimed by a parent, a student can’t do the same being reported as a dependent. More detailed information about tax credits, options, and restrictions can be found in IRS Publication 970 or by calling at 800-TAX-FORM (800-829-3676) to get a print copy. Additionally, when filing taxes, IRS Form 8863, Education Credits is used to calculate the relevant benefits.

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