August is a month many young adults head to college and even some not-so-young adults look to enhance their education.
Both younger and older students can realize some tax breaks for seeking a postsecondary education. In addition to the well-known 529 plans, you have several options to reduce your education expenses. We list below five tax tips for students of higher education.
First step: determine dependency
To individually take many of the must helpful tax credits, another taxpayer (e.g. your parents) cannot claim you as a dependent. For tax purposes, you are a dependent if you are:
- A U.S. citizen (or resident of the U.S.), and
- A full time student and younger than 24 years old, and
- Claimed by your parent as a dependent on their tax return
If you are a dependent, all is not lost at tax time; some of the tax breaks can help your parents.
Some Scholarships Not Subject to Tax
If you receive a scholarship or grant for college and use that to pay for qualifying education expenses, you do not need to claim that money as income.
The IRS defines qualifying education expenses as tuition and any required fees (such as enrollment fees or student activity fees). You will need to claim any portion of a scholarship that you use for living expenses.
Qualifying expenses do not include items such as: books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses (except under The American Opportunity Tax Credit, see below).
If you enter a work-study program or other job while attending college, the IRS will require tax payments for income you receive from that employment. You will need to pay taxes on that income, even when you use it to pay for tuition and other qualifying expenses.
If you need help locating scholarships, check out this resource:
The American Opportunity Credit (a tax break worth up to $2,500)
For the AOC, in addition to qualifying expenses, listed above, you can also deduct the cost of books, supplies and equipment required for your course of study.
This credit provides a tax break of $2,500 on the first $4,000 you spend. It pays 100% of the first $2,000 and 25% of the next $2,000 (for a total max of $2,500).
To receive this tax benefit, you must attend college at least half-time for on academic period during the year. This tax credit has other caveats. You:
- Can only use the credit during the first four years of your college education.
- Must use the money to attend a program that leads to a degree, certificate or another recognized credential.
- Must be a single filer with less than $$90,000in AGI or a joint filer with less than $180,000AGI.
Note: The tax credit decreases as your income rises and disappears entirely for single filers with an AGI greater than $90,000 or joint-filers with an AGI greater than $180,000.
The Lifetime Learning Credit (worth up to $2,000)
With the Lifetime Learning Credit, the IRS provides more flexibility for education-seeking taxpayers. The agency does not limit the number of years you can take this credit.
You can get a tax break of 20% on a maximum $10,000 of eligible expenses every year, which provides a $2,000 annual benefit.
To take this credit, you must:
- Attend a course related to a postsecondary degree or take a course to improve your job skills, and
- Take the course at an eligible educational institution, which can include a college, university, or vocational school
This credit phases out for higher-income individuals. For the 2016 tax year, the credit phases out in the following ranges. Any income above the highest range is not eligible to take the credit.
Lifetime Learning Credit Income Phase-our Ranges:
- $55,000 to $65,000 : Single Filer
- $110,000 to $130,000 Joint Filers
Note: You cannot claim the Lifetime Learning Credit and the American Opportunity Credit in the same year.
Student Loan Tax Deduction (up to $2,500)
Tax payers can deduct up to $2,500 in student loan interest. To take this deduction, the limitations are:
If you are a single-filer and your AGI is:
- Less than $65,000, you can take the full deduction
- Between $65,000 and $80,000, you get a reduced deduction based on a phase out limit
- Greater than $80,000, you cannot take this deduction
If you are a joint-filer and your AGI is:
- Less than $130,000, you can take the full deduction
- Between $130,000and $160,000, you get a reduced deduction based on a phase out limit
- Greater than $160,000, you cannot take this deduction
Education Tax Exclusion for US Savings Bonds
If you redeem EE Savings Bonds (issued later than 1989) and use the funds to pay for qualifying education expenses, the IRS may not require taxes on the interest you earned.
To qualify for this tax deduction, the bond holder must have been older than 24 years of age when the US Treasury issued the bonds. This means parents should own the bond for their child’s education. You cannot list your child as a co-owner.
To take this tax exclusion, you must:
- Spend the funds on qualified higher education expenses during the same tax year you redeemed the bonds
- Have the bond registered in your name, if you are using it for your education
- File jointly (if you are married)
- Attend a qualifying postsecondary institution
- Meet certain income requirements
Good luck in the new school year and contact us if you have any tax questions.