By: Theresa A. Smith
Education costs are on the rise, but you will be happy to know there are education tax deductions and credits that can help offset the costs.
Work related education expenses:
A deduction is available if the education maintains or improves the skills related to your trade or business. Educational costs are also deductible if the education is required to keep your position or job. Work related educational costs are not deductible if the education is required to get into the field or qualifies you for a new trade or business. If your educational costs are deductible under these tests, you can include the transportation costs involved. If you’re away from home for deductible education, you can include the costs of travel, meals (at 50%), and lodging as well. In the case of an employee, education expenses that are deductible under these tests may be claimed as an itemized deduction, but only to the extent the expenses, along with other miscellaneous itemized deductions, exceed 2% of the taxpayer’s adjusted gross income (AGI).
You must reduce your deductible expenses to the extent you receive a tax-exempt scholarship for education. Similarly, to the extent an employee has his education costs reimbursed by his employer, the amount qualifying as deductible is reduced.
Student loan interest:
If you incur debt in obtaining education, interest you pay on student loans taken out may be deductible as an above-the-line deduction, i.e., it’s subtracted from gross income to determine AGI. The maximum deduction is $2,500 per year, subject to a phase-out for taxpayers with high AGI.
American Opportunity Tax Credit/Lifetime Learning Credit:
Instead of taking a deduction for education expenses, taxpayers may claim the American Opportunity tax credit (AOTC)/Lifetime Learning credit for qualified tuition and related expenses. The maximum AOTC a taxpayer may claim is $2,500 per year per student, for the first four years of undergraduate education at an eligible education institution. The maximum Lifetime Learning credit that may be claimed is $2,000 per year per taxpayer, for any post-high school education (including courses to acquire or improve job skills) at an eligible education institution. The AOTC/Lifetime Learning credits are also subject to phase-out for taxpayers with high AGI.
Qualified tuition deduction:
The tuition and fees deduction allows you to take up to $4,000 off your taxable income per year for taxpayers who don’t claim the American Opportunity tax credit or Lifetime Learning credit. “Qualified tuition and related expenses” are for higher education paid during the tax year which includes tuition and fees for the enrollment or attendance of you, your spouse, or any dependent for which you can claim a personal exemption, for courses of instruction at an eligible institution of higher education.
Determining which option is best:
The key is to decide how to take maximum advantage of these rules. Taxpayers who take the standard deduction instead of itemizing their deductions will generally benefit more by claiming the American Opportunity tax credit /Lifetime Learning credit or the qualified tuition deduction. For other taxpayers, consideration should be given whether to take an itemized deduction, the American Opportunity tax credit /Lifetime Learning credit, or the qualified tuition deduction for their education expenses. Please let us know if you need assistance figuring the best option to put more education money back in your pocket.