3 Tax Credits and Deductions for Students
It’s tax season again, which means it’s that time of the year that we all puzzle over the many convoluted rules from the IRS and attempt to decipher government legalese. If you’re a little late getting started this year, don’t worry, you’re not alone—up to 25% of all Americans wait until the last two weeks to file. If you’ve never filed your taxes before, check out this helpful article from our friends at NerdWallet.
Filing taxes can get really complicated, in no small part because there are literally hundreds of deductions and tax credits available. Although they can be a headache to work through, they can save you big time. Programs like TurboTax can help you work through them and figure out which ones you might be eligible for, but it’s always a good idea to do some of your own research to make sure that you aren’t overpaying.
What’s the difference between a tax deduction and a tax credit?
Tax deductions and credits can both save you money, but they’re often confused. A tax deduction is an amount of money taken off your Adjusted Gross Income, or AGI, which is used to calculate how much you owe in taxes. The lower your AGI is, the lower your tax bill. A tax credit is an amount of money taken out of your tax bill. While a tax credit is generally more valuable, a lower AGI can also really help you save money over the course of the year. If you have a lower AGI, you may be eligible for more government programs and subsidies, like a higher health insurance subsidy.
Here are three credits and deductions you can take if you’re a student, or if you’re still paying your student loans.
Student Loan Interest Tax Deduction
What is it?: Deduct up to $2,500 from your income if you made payments on your student loans. Only payments you made against interest apply.
The details, according to the IRS:
“Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.”
In plain English:
If you made payments on your student loans last year, you can reduce your AGI by up to $2,500, as long as it was used to pay interest on the loan. You can also include any interest paid on a credit card you used for education-related expenses. If your wages were garnished by a student lender, you can count that in the deduction. You have to have made under a certain amount of income (under $85,000 if you’re single, and under $170,000 if you’re married and filing jointly), and the amount you can claim lessens above $70,000 if you’re single and $140,000 if you’re married and filing jointly. You cannot claim the deduction if you’re married and filing separately.
2. American Opportunity Tax Credit
What is it?: Lower your tax bill by up to $2,500 on any expenses for your undergraduate education.
The details, according to the IRS:
“The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.”
In plain English:
This one only applies if you’re an undergraduate, or if you’re paying on behalf of an undergraduate dependent, and you can only claim it for four years. It includes all of the first $2,000 you spent on tuition, books, and other school expenses, but it doesn’t include room and board or transportation. You can also claim 25% of the next $2,000 you spent. Even if you don’t owe any taxes and you’re getting a refund, you can get back up to $1,000 on your refund from the American Opportunity Tax Credit. Like the Student Loan Interest Tax Deduction, there are income limits. You have to have made $90,000 or less if you’re single ($180,000 if you’re married and filing jointly), and the amount you can claim lessens above $80,000 if you’re single ($160,000 if you’re married and filing jointly).
3. Lifetime Learning Credit
What is it?: Lower your tax bill by up to $2,000 on any expenses for your undergraduate, graduate, or other education, even if you’re not pursuing a degree.
The details, according to the IRS:
“The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.”
In plain English:
The Lifetime Learning Credit is similar to the American Opportunity Tax Credit. This one applies to any education, whether you’re an undergraduate, graduate, or non-degree seeking vocational student, and there is no four year limit. It includes 20% of all expenses paid on up to $10,000 in costs for tuition and fees, and it also does not include room, board, or transportation. The credit begins phasing out over an AGI of $59,000 ($118,000 if married and filing jointly), and you’re no longer eligible if your income is over $69,000 ($138,000 if married and filing jointly). Unlike the American Opportunity Tax Credit, your refund will not increase if you claim the credit and you don’t owe any taxes.
