Federal Tax Credits & Tax Deductions

Tax Credits

The federal government offers tax credits to help qualifying college students (or parents of dependent college students) offset the cost of higher education. As explained by Joseph C. Maida, CPA,  tax partner at Maida Mackler LLC of Ewing, New Jersey, tax credits offer a “dollar-for-dollar reduction in your tax bill.” 

Although the exact names, terms, and credit amounts can vary from year to year, the two tax credits outlined below will be in effect for at least the 2011 and 2012 tax return seasons, according to the Internal Revenue Service’s “Tax Benefits for Education: Information Center,”. If you paid for college expenses during previous tax years (before 2010), or if you plan to pay for college expenses during subsequent tax years (after 2012), the same terms might not apply to your tax returns. [1] Consult your tax advisor or the Internal Revenue Service (IRS) for additional information.

The American Opportunity Credit (formerly The Hope Credit)

Description: A federal income tax credit, which expands and renames the preexisting Hope Credit. Qualifying taxpayers may be able claim this credit for the first four years of their (or their children’s) postsecondary study.

Amount: Taxpayers may be credited up to $2,500 for qualifying tuition and related expenses. If the taxpayer does not owe the government a tax payment, he may be refunded up to 40 percent of the credit, which would translate into a maximum of $1,000.

Requirement 1: To receive the maximum credit, the taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less if filing jointly). The amount credited is gradually reduced for taxpayers whose MAGI is more than  $80,000 but less than $90,000 ($180,000 or less if filing jointly).Taxpayers with a MAGI above $90,000 ($180,000 if filing jointly) will not qualify.  If your filing status is “married,” you cannot be filing separately (MFS).

Requirement 2: The credit is only available for four years of college-level study. If you’ve already received four years of American Opportunity or Hope Credits, you may qualify to claim the Lifetime Learning Credit, instead. If you’re a parent, making claims for the tuition of different children, each child may qualify for four years of this credit.

Requirement 3: You (or the dependent student) must be enrolled at least half-time, during at least one academic period for the tax year. 

Requirement 4: Expenses cannot include room and board, mandatory student insurance, or transportation costs.

Filing Requirements: Eligible taxpayers should file Form 8863, attached to Form 1040 or 1040A. “The student must be listed as either a taxpayer or a dependent on the tax return,” explains Joseph C. Maida.

The Lifetime Learning Credit

Description: A federal income tax credit that may be claimed by qualifying college students (or their parents) for an unlimited number of years. Unlike the American Opportunity Credit, this credit is available to students who are not necessarily working towards a degree, certificate, or other educational credential.  Enrollment at an eligible institution, which provides individual courses or training programs, may be sufficient for qualification.

Amount: Taxpayers may be credited up to $2,000 for qualifying tuition expenses. If the taxpayer does not owe the government a tax payment (has no “tax liability”), the credit amount is not refundable.

Requirement 1: The taxpayer’s modified adjusted gross income must be $60,000 or less ($120,000 or less if filing jointly). 

Requirement 2: The credit cannot be combined with the American Opportunity Credit during the same tax year (unless being claimed on behalf of multiple students). 

Filing Requirements: Eligible taxpayers should complete Parts II and IV of Form 8863, and submit it with their Form 1040 or 1040A. The student must be listed as either a taxpayer or a dependent on the tax return.

Tax Deductions

Unlike tax credits, tax deductions help to lower the amount of federal taxable income for qualifying college students and those who support them.  Tax deductions are subtracted from your taxable income. So if you normally owe money to the federal government, tax deductions may help you owe a little less. If you don’t owe any money, a tax deduction will not result in a refund.

As of October 2011, the IRS highlights three types of education-related tax deductions. Eligibility requirements for these deductions may overlap with the requirements for the above tax credits, meaning qualifying taxpayers should file for the benefit (credit or deduction) that best suits their individual situation.

Tuition & Fees Deduction

Description: A federal income tax deduction claimed by qualifying college students (or their parents) in order to lower the amount of taxes they owe. Some taxpayers may opt to claim this deduction if they earn too much money to claim the American Opportunity or Lifetime Learning Credit, or if this option lowers their tax liability more than either of the available credits. 

Amount: May reduce your taxable income by up to $4,000. 

Requirement 1: The taxpayer’s modified adjusted gross income must be $80,000 or less ($160,000 or less if filing jointly). And if your filing status is “married,” you cannot be filing separately (MFS).

Requirement 2: No one else can claim an exemption for you, as their dependent. 

Filing Requirements: Eligible taxpayers should report this deduction on Form 8917, Tuition and Fees Deduction, as an adjustment to income.

Student Loan Interest Deduction

Description: A federal income tax deduction claimed by qualifying college students (or their parents) who have paid interest on an education-related loan during the tax year. This deduction is only available to individuals whose student loans are already in repayment.

Amount: May reduce your amount of taxable income by up to $2,500. 

Requirement 1: The taxpayer’s modified adjusted gross income (MAGI) must be less than $75,000 (less than $150,000 if filing jointly). To receive the maximum deduction, the taxpayer’s MAGI must be $60,000 or less ($120,000 or less if filing jointly). The deduction is gradually phased out for taxpayers whose MAGI is more than  $60,000 but less than $75,000 ($150,000 if filing jointly).

Requirement 2: The full amount of the loan must have been used towards education-related expenses (which may include room and board), and the loan can’t have been issued by a relative or an employer. 

Filing Requirements: If you paid $600 or more of student loan interest during the tax year, your loan provider will send you a Form 1098-E, Student Loan Interest Statement.  Taxpayers should file using this statement and instructions for income adjustment on Form 1040.

Business Deduction for Work-Related Education

Description: A federal income tax deduction claimed by qualifying college students who completed an academic course or degree program directly relevant to their current career.

Amount: The total amount of your work-related education and other miscellaneous deductions minus two percent of your adjusted gross income. You can find your adjusted gross income on line 38 of Form 1040 or on line 37 of Form 1040NR.

Requirement 1: The education you’re citing must either maintain/improve the skills needed for your present role or be required by your employer to keep your present salary, status, or job. Minimal education requirements that are mandated by your state or a professional organization (e.g. a bachelor degree for state-certified teachers) do not qualify for work-related education deductions. Further, the education cannot be preparing you for a new career field.

Requirement 2: You must be working.   

Filing Requirements: If you are an employee, you should itemize your work-related education deductions on Schedule A of Form 1040 or Form 1040NR.  


[1] http://www.irs.gov/newsroom/article/0,,id=213044,00.html

The information contained within this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a tax professional. Any U.S. federal tax advice contained in this article is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.

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