Five Major Tax Breaks for Students
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UPDATED: Jan 30, 2013
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Contain your excitement; tax season is upon us.
For many college students and recent graduates, this is an opportune time to use the tax advantages that come with carrying college debt or having attended college.
Unfortunately, most students don’t know that they are eligible for a large number of tax benefits. Here’s a list of the five major tax breaks that college students and college loan borrowers can take advantage of in the coming weeks leading up to April 15.
1. The Tuition and Fees Deduction
Through the Tuition and Fees Deduction, you can deduct qualified tuition and related expenses that you have paid for yourself, a spouse, or a dependent. According to the IRS, this deduction cannot be used in conjunction with the American Opportunity credit or Lifetime Learning credit (more on those below). Also, you cannot deduct certain scholarships, fellowships, or grants. This deduction will also not be permitted if you are a dependent or married but filing separately.
“The Tuition and Fees Deduction allows students to deduct up to $4,000 or up to $2,000 of qualified expenses for their higher education. The amount depends on the filing status of the student and their income level. With no course load requirement or limit on the number of years the deduction can be taken, this is certainly something students will not want to overlook,” said Riley Holmes, H&R Block Tax Professional in Chicago, in an interview with loans.org.
2. The Student Loan Interest Deduction
This tax break is only for students that have borrowed college loans themselves.
“They can deduct up to $2,500 of interest per return each year they file,” said Holmes.
The Student Loan Interest Deduction is considered an “above-the-line” exclusion from the filer’s income. Filers can only claim this deduction if they paid interest on a college loan in the 2012 fiscal year; so that should cover most of the millions of current borrowers that are making payments on their debt.
3. The American Opportunity Tax Credit
Under the American Opportunity Tax Credit, students are able to claim a maximum annual credit of $2,500 for the first four years of college. Qualified write-offs include most college expenses like tuition, fees, textbooks, class supplies, and equipment. Forty percent of the credit is refundable, meaning that students can receive a tax return of up to $1,000 even if they don’t owe any taxes, according to the IRS.
In order to qualify a person must earn $80,000 or less. This is doubled for couples that are jointly filing.
4. The Lifetime Learning Credit
According to the IRS, claimants of the Lifetime Learning Credit can claim up to $2,000 for qualified education expenses that are paid for by an eligible student. Qualified expenses include tuition, fees for enrollment or attendance, textbooks, class supplies, and class equipment. The Lifetime Learning Credit is considered a nonrefundable credit. A credit directly reduces the tax itself rather than the amount of income that is subject to tax. This could reduce a student’s tax to zero but any excess won’t be refunded to the claimant.
In order to be eligible for this credit, claimants must be earning less than $61,000 if they are single, and double that amount if they are married and jointly filing. Unfortunately, if you are a current student or recent graduate that is listed as a dependent on your parents’ tax return, then you are ineligible.
“Keep in mind you can’t claim both the American Opportunity and Lifetime Learning Credits. If you qualify for both, simply choose the one worth more,” said Jessi Dolmage, Spokesperson for TaxACT, in an interview with loans.org.
5. The Employer-Provided Educational Assistance Benefit
This benefit is a little rare to come upon and it also goes by the name “tuition reimbursement.” You will only qualify for this if your employer paid for an educational course that was at an associate, undergraduate, or graduate level of studies.
An employee can exclude up to $5,250 in income using this tuition reimbursement benefit. However, not all employers are required to provide this assistance, even if they pay for their employees’ educational courses. Companies reimburse their employees in order to recruit better talent and also to keep existing employees. The reimbursement must be offered to all employees and cannot favor the more highly compensated employees. So anyone who had their coworkers reimbursed but was denied a reimbursement has just cause for pursuing a complaint or possible legal action.
Naturally, you need to choose wisely and select whichever benefit saves you the most money. It’s a tough decision to make but April is still months away, so you have time to decide what course of action is best when filing and what benefits you want to take advantage of this year.