Get A+ Tax Savings with Education Tax Breaks

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If you think education tax breaks are only for those with college kids, you could be leaving money on the table.

In a Government Accountability Office review entitled, “Improved Tax Information Could Help Pay for College,” 14 percent of filers of almost 11 million eligible returns failed to claim an education tax credit or tax deduction losing an average tax benefit of $466.

“Those paying expenses for family members to attend any type of school may have the potential to claim and even combine different education tax incentives,” said Amy Wang, Certified Public Accountant (CPA), technical manager for the American Institute of Certified Public Accountants. “A CPA can determine which education tax breaks result in the lower tax for your family.”

She says the different eligibility and income requirements among the available education tax incentives makes using at-home tax software to figure which works for each student in your family labor-intensive. “A CPA uses your entire family return, each specific student’s education expenses and your modified adjusted gross income (MAGI) to make the determination, especially helpful when you have multiple types of students paying for education within your household,” Wang said.

Look out for tax form 1098-T this month, supplied by your institution, and supply it to your tax preparer for eligibility for any of the following education tax breaks.

Education credits

A tax credit reduces the amount of income tax you may have to pay. You cannot claim both credits for the same student in one year.

American Opportunity Credit

The American Opportunity tax credit, which expanded the previously-named Hope scholarship credit, can be claimed through 2017 for the first four years of college for eligible education expenses. Taxpayers with a MAGI of $80,000 or less ($160,000 or less for married couples filing jointly) will receive a tax credit up to $2,500 per student.

Lifetime Learning Credit

Taxpayers with a MAGI of $63,000 or less ($127,000 or less if married, filing jointly)

may be able to claim a yearly lifetime learning credit of up to $2,000 for any qualified education expenses paid. There is no year limit to claiming this credit for each student so it’s helpful to graduate students and for continuing education not toward a degree.

Education deductions

A deduction reduces your taxable income to reduce your tax liability. You cannot claim both education credits and deductions for the same student in any year.

Tuition and Fees Deduction

Extended through 2013, this deduction can reduce your taxable income by up to $4,000. You can claim this deduction (even if you do not itemize deductions) if your MAGI is too high for the Lifetime Learning Credit but is $80,000 or less ($160,000 or less if married, filing jointly).

Student Loan Interest Deduction

If you are paying student loans for college expenses including for graduate school, and your MAGI $75,000 or less ($150,000 or less if married, filing jointly), there is a special interest deduction maximum of $2,500 per student, even if you do not itemize deductions.

Business deduction for work-related education

If you itemize deductions, this deduction will be the amount by which qualifying work-related education expenses (and specific other job and miscellaneous expenses) is greater than 2 percent of your adjusted gross income (AGI). If you are self-employed, you can deduct expenses for qualifying work-related education from your self-employment income. This education must maintain or improve skills required by the employer or the law to keep your present salary and job such as required refresher courses and certifications, current developments and academic or vocational courses.

Savings Plans

Certain education savings plans allow the accumulated interest to grow tax-free or allow tax-free the distribution or both.

529 Plans

These 529 plans are usually state-sponsored qualified tuition programs which allow tax-free earnings on contributions to an account for paying a student’s qualified college expenses. Contributions to 529 plans are not deductible, but there is also no income limit for contributors. These savings may affect financial aid and the information you supply on your yearly FAFSA form. Plan distributions are tax-free when used to pay qualified higher education expenses for a designated beneficiary. Often, states with an income tax may offer some additional tax benefits.

Coverdell Education Savings Account (ESA)

If your MAGI is $110,000 or less ($220,000 or less if married, filing jointly) you can contribute to a Coverdell ESA which can be used to pay a student’s eligible K-12 or college expenses. Total contributions for the beneficiary cannot be more than $2,000 per year and are not deductible, but they grow tax-free until used.

Scholarships and Fellowships

A scholarship is an amount paid or allowed to a student to aid in paying for education at a school while a fellowship is paid or allowed to a student in the pursuit of study or research at a school. Scholarship or fellowship amounts are tax-free when used to pay eligible expenses if you are a candidate for a degree at an institution whether undergraduate or graduate.

Exclusions from Income

These amounts are not included in your taxable income.

Employer-Provided Educational Assistance

You can exclude up to $5,250 of educational benefits paid by your employer per year from your income. These can be payments for eligible expenses for undergraduate or graduate courses. Any amount your employer pays toward education for you over $5,250 is considered taxable earnings, unless it qualifies as a working condition fringe benefit would be taxable unless it is considered a working condition fringe benefit. This is a benefit which, if you paid for it, you could deduct as an employee business expense. Check with your employer to learn about education benefits they provide.

Naomi Mannino has been writing and reporting on personal finance and health for over 15 years and is a contributor to several websites, including Schools.com. She earned her Bachelor’s Degree in Marketing with a minor in Consumer Behavior from Pace University in New York City.

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