It’s not a surprise that not many people look forward to preparing their tax return, but if you’re a student (or the parent of a student) and have a few pieces of information handy, you may dread tax season a little less.
If you’re an undergraduate or grad student, a professional taking degree courses, or a parent who is helping your child with tuition, you may be eligible for one or more higher education tax credits and deductions (also called student loan tax credits and deductions). What does that mean for you? It means that being a student, or the parent/guardian of a student, may help you during tax time.
Student loan tax credit and deductions
You might be asking yourself, “What are student loan tax credits and deductions?” Tax credits reduce the amount of taxes you owe, while tax deductions reduce the amount of income on which you are taxed. Both can help when you are getting ready to file.
Before you dive into the nitty-gritty, there are a few questions you might want to answer first:
- Is your student loan eligible? Not all student loans are eligible for all higher education tax deductions, so you’ll need to determine if your loan qualifies. The Internal Revenue Service provides the eligible loan criteria for claiming a tax deduction on their website (see Topic No. 456), but you may also want to consult with a tax professional to find out more about what tax benefits are available to you.
- What is your MAGI? Your modified adjusted gross income (MAGI) can affect your eligibility to claim certain tax credits and benefits. How much you can receive in a credit or tax deduction is based upon your MAGI, so knowing your MAGI before you begin your taxes can help streamline the process.
- Who can claim the tax credit or deduction? Determining who claims a tax credit or benefit is a family decision. A tax credit can be claimed by an individual if you, your spouse, or a dependent you list on your tax return is the student. A tax deduction can be claimed if you are legally obligated to pay interest on the loan and if you (or your spouse, if filing jointly), can’t be claimed as a dependent on someone else’s return. There are different criteria for tax credits and tax deductions, so make sure you check the IRS website or consult with a tax professional if you have questions.
Student loan tax credits and benefits
Now that you have a few key pieces of information handy, here are several credits and benefits available for families:
- The American Opportunity Tax Credit. If you are a student enrolled at least half time in a program leading to a degree or other recognized educational credential, you may be eligible for a tax credit of up to $2,500 per year. This tax credit is for tuition, enrollment fees, and course material expenses during your first four years of higher education. Single filers with a MAGI of up to $90,000 and married filers with a MAGI up to $180,000 may qualify for this credit.
- The Lifetime Learning Credit. This credit covers up to $2,000 per year in expenses related to all years of post-secondary education, as well as non-degree courses to acquire or improve job skills. There is no limit on the number of years it may be claimed. The amount of the credit is gradually reduced if your MAGI is between $58,000 and $68,000 ($116,000 and $136,000, if you file a joint return). Note that if your MAGI is $68,000 or greater for a single filer or $136,000 for married filing jointly, you can’t claim the Lifetime Learning Credit.
You can claim either the American Opportunity Tax Credit or the Lifetime Learning Credit may be claimed in one tax year, but not both.
- Student loan interest deduction. If you have federal or private student loans, you may be eligible to deduct up to $2,500 of interest as an adjustment to your taxable income. The student must be enrolled at least half time in a program leading to a degree or other recognized educational credential. Single filers with a MAGI between $70,000 and $85,000, and joint filers with a MAGI between $140,000 and $170,000, may qualify for this deduction.
- Tuition and Fees Deduction. If you have qualified higher education expenses, you may qualify for the Tuition and Fees Deduction. If eligible, you can reduce your taxable income by up to $4,000. A single filer with a MAGI less than $80,000 and joint filers with a MAGI less than $160,000 may qualify for this deduction.
- Tuition waivers for graduate students. Graduate students with qualified tuition reductions do not have to report the value of the reduction as taxable income. Tuition waivers may be taxable above a certain limit and not all employment types qualify, so consult with your school to see if your waiver is reportable as income.
Preparing your taxes can be tedious, but the effort may be worth it when you apply student loan tax credits and benefits. Just remember that there are criteria around which loans are eligible for deductions and who (student, parent, or third-party) can claim a tax credit or deduction, so make sure to do your homework, or consult a tax professional for advice, before you file.
Information in this article is not intended to provide, nor should it be relied on, for tax, legal, or accounting advice. For more information on eligibility for higher education tax deductions and credits, consult IRS Publication 970, “Tax Benefits for Higher Education,” or a personal tax advisor.