Legal Services for Students
Higher Education Tax Incentives
There are two federal tax credits and two deductions that may be available to help you offset the costs of higher education. These are the American Opportunity and the Lifetime Learning Credits and the Tuition and Fees and the Student Loan Interest Deductions. These credits and deductions can reduce the amount of taxes that you, or a person claiming you as a dependent, are required to pay. The following information provides only a basic overview of credits and deductions for higher education expenses. For more information, please refer to IRS Publication 970 and Tax Benefits for Education: Information Center.
Tax Credits to Help Pay Higher Education Costs
To qualify for either of these credits, you must pay postsecondary tuition and fees for yourself, your spouse, or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student generally cannot file for a credit. These credits are calculated on Form 8863 Education Credits.
Only one of these credits can be claimed for a student in a single tax year.
Here are some key facts the IRS wants you to know about these valuable education credits:
- The American Opportunity Credit
- The credit can be up to $2,500 per eligible student.
- It is available for the first four years of post-secondary education.
- Forty percent of the credit is refundable, which means that you may be able to receive up to a $1,000 refund based on this credit, even if you do not owe any tax.
- The student must be pursuing an undergraduate degree or other recognized educational credential.
- The student must be enrolled at least half time for at least one academic period.
- Qualified expenses include tuition and fees. It also includes expenses for course-related books, supplies, and equipment whether or not you purchased these from the educational institution.
- The full credit is generally available to eligible taxpayers who make less than $90,000 (or $180,000 for married couples filing a joint return).
- Lifetime Learning Credit
- The credit can be up to $2,000 per eligible student.
- It is available for all years of postsecondary education and for courses to acquire or improve job skills.
- The maximum credit is limited to the amount of tax you must pay on your return (i.e. the credit is non-refundable).
- The student does not need to be pursuing a degree or other recognized education credential.
- Qualified expenses include tuition and fees. It also includes course-related books, supplies, and equipment provided they are purchased from the educational institution.
- The full credit is generally available to eligible taxpayers who make less than $61,000 (or $122,000 for married couples filing a joint return).
Tuition and Fees Deduction
You may be able to deduct qualified educational expenses paid during 2011 for yourself, your spouse and your dependents. This deduction can reduce the amount of your taxable income by up to $4,000. You do not have to itemize to claim qualified tuition and fees as a deduction unless you claim them as a miscellaneous or business expense. If you claim qualified tuition and fees as a tuition and fees deduction, the deduction is taken as an adjustment to income on page 1 of Form 1040 or Form 1040A. Qualified expenses include tuition and fees and course-related books, supplies and equipment provided they are purchased from the educational institution.
You cannot take the tuition and fees deduction on your income tax return if your filing status is married filing separately, or if you may be claimed as a dependent on someone else's return. You cannot claim this deduction if your modified adjusted gross income is more than $80,000 ($160,000 if filing a joint return.) The tuition and fees deduction and an American Opportunity or Lifetime Learning credit cannot be claimed for the same student.
Student Loan Interest Deduction
The Student Loan Interest Deduction can reduce your taxable income by as much as $2,500. It is taken as an adjustment to income, which means you can claim this deduction even if you do not itemize deductions on Schedule A of Form 1040. You can deduct interest paid on a student loan for yourself, your spouse, or your dependents. You are eligible to take the deduction if your modified adjusted gross income is $75,000 or less ($150,000 if filing a joint return). The amount of the Student Loan Interest Deduction you are eligible for depends on the amount of interest paid and your income.
Qualified student loans must have been used to fund educational expenses such as tuition, room and board, fees, and books for a student enrolled at least half-time and pursuing a degree, certificate, or similar program at an eligible institution. You cannot claim this deduction if your filing status is married filing separately or if another person can claim you as a dependent on his or her tax return. You can figure your Student Loan Interest Deduction using the Student Loan Interest Deduction Worksheet on page 34 of the IRS Publication 970.
The 1098-T Form
You will receive information about your 2011 educational expenses in a 1098-T statement from the institution of higher education you attended. Schools are required to send this information to each student and to the IRS by Jan. 31, 2011. (You might receive this by mail or electronically. Be sure to save this information, or give it to the person who claims you on their tax return if you don't claim yourself.) If your 1098-T doesn't include amounts you paid for course-related books, supplies, and equipment, and these expenses are allowed for the credit or deduction you are taking, you can use your own records to figure the amounts paid for these items and report the total on your tax return. Additionally, KU reports only the amount billed to you on the 1098-T Forms it issues, which doesn’t necessarily reflect the amount that a student has actually paid through loans and other means besides scholarships and grants. Because of this, please be sure to use student financial records from Enroll and Pay when calculating your qualified educational expenses.
Taxability of Student Financial Aid and Loan Forgiveness Programs
A deduction or credit cannot be claimed based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest, or employer-provided education assistance. The same rule applies to expenses you pay with a tax-exempt distribution from a qualified tuition plan, except that you can deduct qualified expenses you pay only with that part of the distribution that is a return of your contribution to the plan.
Scholarships, fellowships, and grants that you received and that are reported on the 1098-T may need to be reported as taxable income in certain circumstances, but are often tax-free. In general, if you are pursuing a degree, certificate, or program of training towards gainful employment, and used the funds to pay tuition, fees, or required books, supplies, and equipment, these sources of assistance are not counted as taxable income.
If you've received a student loan that states it can be forgiven, cancelled, or paid if you work for a certain period of time, in certain professions, for any of a broad class of employers, then the amounts forgiven may qualify for tax-free treatment.
For more information about these credits and deductions, and for information about what expenses are considered qualified tuition and expenses, see IRS Publication 970, or call the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).