Attending a college or university is one of the best ways to increase lifetime earning potential, but students often face high expenses in the short-term that can make an education difficult to afford. The U.S. government assists students through grant programs as well as a variety of tax breaks related to higher education. If you are a student, a parent of a student or have student loan debt, you may stand to save money on your taxes.
Tax Deduction for Tuition and Fees
For many students, the majority of the cost of college comes in the form of tuition. The IRS offers a tax deduction for tuition and fees paid for yourself, your dependent or your spouse. The maximum allowable deduction is $4,000 and the deduction is only available to individual tax filers with a modified adjusted gross income of $80,000 or less and joint filers with income of $160,000 or less. If you are married but file a separate tax return, you cannot claim the deduction. The deduction for tuition and fees applies regardless of whether you decide to itemize your tax deductions or use the standard deduction.
Student Loan Interest
Due to the high cost of education, many students and parents are forced to borrow money to pay for tuition, fees and other expenses. The IRS offers a student loan interest deduction to individuals with less than $75,000 in modified adjusted gross income and joint filers who make less than $150,000. The loan interest deduction allows you to deduct up to $2,500 of student interest paid on your tax return. The deduction only applies to qualified student loans used to pay for qualifying education expenses. A student loan is generally qualified if you took it out for yourself, your dependent or your spouse to pay for tuition, fees, room and board, books or other education related supplies, equipment and expenses. Interest paid on a loan given to you by a relative is not deductible.
American Opportunity Tax Credit
The American opportunity tax credit is a special tax credit that introduced with the American Recovery and Reinvestment Act designed to help spur economic growth and stop the recession that began in the late 2000’s. Individuals with a modified adjusted gross income of $80,000 or less and joint filers with income of $160,000 or less are eligible for up a $2,500 tax credit on qualifying education expenses which include tuition and fees that are a condition of enrollment or attendance. Certain expenses, such as room and board, insurance, transportation do not count as qualifying expenses. The credit was set to expire at the end of 2010, but was extended until the end of 2012 by congressional legislation.
Even after you finish a college education and get a job, your employer might require you to get more education to improve upon your job skills. The IRS says that you can deduct the cost of education that your employer requires you to get to keep your current job, salary or status or that improves upon the skills you need to use in your job. You cannot, however, deduct the cost of education if the education is part of a program that will qualify you to work in a new trade or business.