Tax Tips and Tidbits
January 25, 2017
By Steven R. Anderson E.A.
This past week many of the local Colleges and Universities welcomed back students for the start of the spring semester, so I thought it would be a good time to discuss the Tax Benefits of Education.
Before we get into the education benefits, let’s talk about one of the basic concepts of taxation; the difference between a deduction and a credit. Deductions reduce your income subject to tax. How much you actually increase your refund or reduce your balance due depends on what tax bracket you are in. If you are in the 15% tax bracket, then an additional $1000 deduction would save you $150 in tax. If you already pay no tax, then all the additional deductions in the world will not help you. Zero tax is as low as you can go! Credits, on the other hand, reduce the amount of tax you pay, dollar for dollar. Some credits, like the Child and Dependent Care Credit, are non-refundable, meaning they can only reduce your tax to zero; others, like the Earned Income Credit, are refundable, meaning that if your tax is zero, the credit can still be added to your refund.
Tax Benefits for Education
If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits.
You may claim only one of the following education tax benefits for the same student per year: tuition and fees deduction, American Opportunity Credit, or Lifetime Learning Credit.
Deductions for education expenses include:
- Tuition and fees deduction up to $4,000 from gross income. Income limitations apply.
- The provision for deducting tuition and fees expires for tax years after 2016.
- Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
- Business deduction on Schedule C or F. You can deduct the cost of education related to the business or farm activity.
- Miscellaneous itemized deduction on Schedule A, subject to the 2% AGI limitation. You can deduct the unreimbursed cost of education required to keep your current job or maintain and improve skills needed for your job. You cannot deduct the cost of education that qualifies you for a new trade or business.
The education credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits
- American Opportunity Credit, $2,500 maximum per student per year.
- Lifetime Learning Credit, $2,000 maximum per tax return per year.
| Comparison of Education Credits | ||
| American Opportunity Credit | Lifetime Learning Credit | |
| Up to $2,500 per eligible student. | Up to $2,000 per tax return. | |
| 100% of the first $2,000, plus 25% of the next $2,000 of qualifying expenses for each student. | 20% of the first
$10,000 of total qualifying expenses. |
|
| 40% of the credit (up to $1,000) may be refundable. | Nonrefundable tax credit. | |
| Eligible years:
• Until the first four years of post-secondary education are completed. • Limited to 4 tax years total for the student. |
Eligible years:
• All years of post-secondary education. |
|
| Qualifying expenses:
• Tuition, required enrollment fees, and • Course-related books, supplies, and equipment. |
Qualifying expenses:
• Tuition and required enrollment fees. |
|
| The student must be pursuing an undergraduate degree or other recognized education credential. | The student need not be pursuing a degree or credential. | |
| Student must be enrolled at least half-time for at least one academic period beginning during the year. | Student must be enrolled in at least one course. | |
| Additional restrictions:
• The student can have no felony convictions. • Taxpayer cannot use MFS status and cannot be claimed as a dependent by another person. • Additional conditions apply for nonresident aliens and for taxpayers under age 24. |
Additional restrictions:
• None. |
|
With all of the benefits, remember that the IRS scrutinizes these benefits closely. They can, and often do, ask for proof of all expenses. Be sure to keep copies of Form 1098-T, records of payments, receipts for books, supplies, etc. for at least 3 years.
Steven Anderson is an Enrolled Agent, licensed to practice before the IRS. He is the owner of the Beacon and Pawling franchises of H&R Block where he holds a Master Tax Advisor certification and has 27+ years of experience. Steve is also a graduate of the National Tax Practice Institute and a member of the American Society of Tax Problem Solvers, with specialization in collection cases.
