5 Tax Benefits for Higher Education Expenses

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Federal and state income tax filers may be eligible for tax credits, deductions, exclusions and savings plans to help with expenses for higher education. But what’s the difference?

Tax Credit: Reduces the amount of income tax you may have to pay.

Deduction: Reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.

Exclusion: A taxpayer won’t have to pay income tax on the benefit they’re receiving, but also won’t be able to use that same tax-free benefit for a deduction credit.

Savings Plan: Certain plans allow the accumulated earnings to grow tax-free until distribution, or allow the distribution to be tax-free, or both.

The Internal Revenue Service (IRS) Publication 970 explains details such as income limits, eligibility requirements, qualified expenditures and how to claim benefits. The IRS also has a Tax Benefits for Education Information Center online that lists the programs, some of which are highlighted below. 

• American Opportunity Tax Credit: Allows taxpayers to claim up to $2,500 per student per year for the first four years for qualified tuition and related expenses.
• Lifetime Learning Tax Credit: An individual income tax credit equal to 20% of the first $10,000 of qualified and related expenses paid per year, up to a maximum credit of $2,000.
• Tuition and Fees Deduction: Qualified tuition and related expenses may be deducted up to $4,000. The deduction is only available if the taxpayer’s modified adjusted gross income (MAGI) is $80,000 or less for single filers.
• Student Loan Interest Deduction: Up to $2,500 of the interest you paid on student loans on your federal individual income tax return may be deducted if the taxpayer’s MAGI is $70,000 or less for single filers.
• Qualified Tuition Programs (529 Plans): Withdrawals from Qualified Tuition Programs, used to pay education expenses, are made tax-free.

Even if you normally wouldn’t file a tax return due to your income level, be sure to do so if you’re enrolled in higher education and qualify for one of these benefits. 

Consult a Certified Public Accountant for assistance in implementing these benefits. Contact us to provide a CPA recommendation.

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