One day I’ll have all my student loan debt paid off. Until then, I’ll slowly be paying off education costs like most college-graduated Americans. Although priceless, education is definitely not cheap. Fortunately, there are some education-related tax benefits available to eligible taxpayers. This article will cover the basics of education tax credits, deductions and 529 college savings plans that may provide you with a tax benefit.
Education tax credits
For the 2014 tax year, there are two tax credits available for taxpayers who pay expenses for post-secondary (after high school) education: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC is a tax credit for qualified education expenses paid for an eligible student for the first four years of post-secondary education. To be eligible for the AOTC, the student must meet all of the below:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half-time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
The AOTC’s maximum tax credit is $2,500 per eligible student. The amount of your credit for 2014 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You can’t claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
The LLC is a tax credit for qualified tuition and related expenses paid for eligible students enrolled in an educational institution. To qualify for the LLC, the student must:
- Be enrolled or taking courses at an eligible educational institution
- Be taking a higher education course or courses to get a degree or other recognized education credential to receive or improve job skills
- Be enrolled in at least one course in one academic period beginning in the tax year
The LLC’s maximum tax credit is $2,000 per tax return. The amount of your credit for 2014 is gradually reduced (phased out) if your MAGI is between $54,000 and $64,000 ($108,000 and $128,000 if you file a joint return). You can’t claim a credit if your MAGI is $64,000 or more ($128,000 or more if you file a joint return).
Note: You can’t claim both the LLC and AOTC for the same tax year. For more information about these two education tax credits, view the IRS Instructions for Form 8863.
Education tax deductions
Tuition and Fees Deduction
You may also be able to deduct some tuition and other related expenses paid during 2014 for yourself, your spouse or your dependent. The amount of your tuition and fees deduction (the maximum benefit will reduce your income subject to tax by $4,000) depends on your filing status and MAGI. If your MAGI is over $80,000 (single filers) or $160,000 (if married filing jointly), no deduction is allowed. For more information about this deduction, view the IRS Instructions for Form 8197.
Note: You can’t claim the tuition and fees deduction if you or anyone else claims the AOTC or LCC for the same student. The IRS recommends that you calculate the effect of both options on your tax return and then use the one that provides you with the most tax benefit.
Use this IRS Interactive Tax Assistant Tool to help you determine if you’re eligible for certain educational credits or deductions.
Student Loan Interest Deduction
If your MAGI is less than $80,000 ($160,000 if filing a joint return), you may be eligible for a special deduction allowed for paying interest on a student loan. Student loan interest is defined as interest you paid during the year on a qualified student loan—it includes both required and voluntary interest payments. Depending on your MAGI, you can reduce your income subject to tax by up to a maximum of $2,500.
For this deduction, you must meet these qualifications:
- Your student loan must have been taken out solely to pay qualified education expenses
- Your student loan can’t be from a related person or made under a qualified employer plain
- The student must be you, your spouse, or your dependent
- You (your spouse or dependent) must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
For more information, consult IRS Publication 17.
A 529 plan is a plan operated by either the state or an educational institution, designed with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a beneficiary like your child or grandchild.
There are two basic types of 529 plans: pre-paid tuition plans and savings plans. States are permitted to offer both types of plans, whereas educational institutions may only offer prepaid plans. Setting up a 529 plan for your child is not right for everyone; like any investment decision, the plan’s advantages and drawbacks must be carefully weighed.
Generally, the main tax advantage of 529 plans is that earnings aren’t subject to federal tax and generally aren’t subject to state tax when used for qualified education expenses like tuition, fees, books, and room and board as long as the beneficiary is at least a half-time student. Contributions to a 529 plan, however, aren’t deductible. For more information, check out IRS Publication 970.
Disclaimer: The information provided in this article is general in nature, is not complete, and may not apply to your specific situation. You should consult your own tax advis0r regarding your specific tax needs.
This is an article by Lisa, an attorney, from Florida.