Going Back to School Pays Off: Understanding the Tuition Tax Credit

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“We don’t need no… education!”

Wait a minute Pink Floyd, yes we do. In today’s economy? Most of us definitely do.

I know, I know…

Bill Gates dropped out of school!

Mark Zuckerberg and Steve Jobs both dropped out of school!

True, there are plenty of millionaires and celebrities who dropped out of college and turned out fine. But in the vast majority of cases, numbers don’t lie. (Besides, all of those people at least tried to attend a college for a few years.)

Recent statistics show a bachelor’s degree will help you earn a salary of about $1,100 per week. Someone with just a high school diploma averages half that amount and is more likely to be unemployed.

Even with all of the opportunities, a higher-level education can provide, 39% of students say they would drop out of college to avoid going further into debt.

That’s why this post could change your life.

A tuition tax credit helps offset the cost of school. If you don’t owe tax money because of low income, you can still apply for these tax credits and get extra money refunded to you just for being a student. Unlike a student loan, you never have to pay that refunded tax credit money back.

Want to learn more?

Keep reading.

Tax Credits vs Tax Deductions

It’s important to know there’s a huge difference between tax credits and tax deductions.

Anyone can list deductions when they file their taxes as long as those expenses fall within a qualified category. They’re any dollar amount you want to be removed from what the IRS can consider your total taxable income.

Because deductions have such a small impact on the total taxes you’ll pay, you don’t need to provide any receipts or proof unless the IRS audits you.

Tax credits, however, have a huge impact on how much you’ll pay the IRS. Tax credits are paid toward the total sum of money you owe, regardless of your taxable income.

Tuition tax credits for students have particularly strict guidelines. They require their own form separate from the rest of your taxes.

Tax deductions can save you from overpaying the IRS. But since credits are worth so much more, we’ll break down how to take advantage of the credits first.

Tuition Tax Credits For Students

There are two major tax credits for students in the US right now:

The Amerian Opportunity credit, and the Lifetime Learner’s credit.

Congress made these credits to help regular people just like you offset the mounting costs of post-secondary education. You can essentially have the US government take some of the money you spent on school off your tax tab. But they don’t hand this money to you for wearing a university sweater.

Here’s everything you need to know about each credit. 

1. American Opportunity Credit

Formerly known as the Hope Credit, the American Opportunity Credit is worth up to $2,500 per student per year.

It’s only for students who don’t currently have a bachelor’s degree, so postgraduate student’s can’t take this tax credit.

This credit can apply to four years of post-secondary education.

To qualify – The student must attend school at least half-time working toward a specific degree or certification for at least one academic period during the tax year. In other words, if you’re only taking a few general courses you don’t qualify. You need to be committed to working toward graduation of some kind for at least one semester.

Claimable expenses – Keep track of what you spend on tuition fees, most school supplies, required course materials, and any mandatory school-related fees. These all go toward the dollar amount you can claim.

School-related expenses that don’t count – You can’t use this credit to offset the cost of room and board. It won’t cover transportation to and from class, the health insurance your school makes you pay, or student fees that aren’t required for enrollment.

You also can’t list expenses that you’ve already paid for with tax-free assistance, or that you’ve listed for a different deduction or credit. No double dipping!

To claim this credit – Your school will send you a copy of your 1098-T. This is proof of your enrollment and shows how much tuition your school is charging you. The IRS references your 1098-T if you apply for any student credits or deductions.

The form required to claim the American Opportunity tax credit is Form 8863. You’ll need your school’s EID (employer identification number). Turn in this form when you file your taxes as usual.

If you didn’t make the minimum income necessary to file taxes with the IRS this year, guess what?

You can still get money from this tax credit!

Whether you owe the IRS anything or not, file your tax forms anyway.

Trust me.

What this credit covers – The American Opportunity tax credit covers 100% of the first $2000 of eligible school expenses. If you paid more than $2000, it covers 25% of the next $2,000.

Up to 40% of the total $2,500 owed to you by the American Opportunity credit is refundable—meaning if less than $2,500 of your school expenses qualify, you can get up to $1,000 refunded to you to spend as you wish.

…What!?

Yep.

Income limits – To be fair to all students, this credit is available to anyone with an adjusted gross annual income of $80,000 or less ($160,000 for married households). Students with more income than that can still claim this credit, but not for the full $2,500 amount. Anyone with an income above $90,000 per year can’t claim this credit.

Now let’s take a look at the next biggest tax credit available to students.

2. Lifetime Learning Credit

The most important thing to know:

One student can’t claim both the American Opportunity credit and the Lifetime Learning credit.

Since these credits cover the same expenses, you have to pick one.

Lucky for you, this tuition tax credit is for all student levels, so post-graduate and Ph.D. level students can claim this credit as well as undergrads. There’s also no limit to how many years you can claim the Lifetime Learning credit.

This credit is worth up to $2000 per student.

To qualify – There are no minimum enrollment requirements! If you take one class you can claim this credit.

In fact, the school you go to doesn’t even have to be a traditional, accredited university. If you’re taking any kind of post-secondary education class that you can verify will help you acquire or improve job skills, you can claim the Lifetime Learning credit.

Nice! 

Claimable expenses – The Lifetime Learning credit covers tuition, mandatory school fees, and money spent on course materials just like the American Opportunity credit.

School-related expenses that don’t count – You guessed it. You can’t use the Lifetime Learning credit to offset the cost of room and board, transportation, or any of the things that can’t be covered by the American Opportunity credit either.

To claim this credit – If the institution offering your class gives you a 1098-T, great. If not, don’t sweat.

The form for the Lifetime Learning credit is Form 8863. Hand this in with the rest of your taxes when you file as usual.

What this credit covers – Technically speaking, this credit covers 20% of the first $10,000 in tuition costs or other additional course expenses.

I know what you’re thinking…

Awesome! So if I take one class for $200 I can get the rest of the $2,000 of this credit refunded to me, right?

Nope.

The Lifetime Learning credit is non-refundable. When you claim this credit, you’re simply asking the IRS to take what you’ve already spent on school off of what you owe. If you don’t have $2,000 worth of eligible school expenses, you’ll get as much as you can from that tax credit and nothing more.

Still, that’s a potential $2,000 of taxes you don’t have to give the IRS for being a student.

Income limits – This is another way the Lifetime Learning credit is different from the American Opportunity credit. The eligible income limits are much lower.

Your adjusted gross annual income must be below $57,000 to claim the Lifetime Learning credit (or $114,000 for married households). If you earn slightly more than that the $2,000 will be adjusted. Those earning more than $67,000 per year can’t claim this credit at all.

Phew!

Did you catch all that?

Here’s what you (or a student you claim as a dependent) can learn from all this:

Take advantage of the American Opportunity credit for as long as you can. If you decide to go to graduate school, or can’t miss work to be in school at least half-time, the Lifetime Learning credit is the way to go.

Alright, now on to deductions.

Student Loan Interest Deduction

If anyone in your household has started paying back their student loans, listen up.

The Studen Loan Interest deduction allows you to remove up to $2500 from your taxable income, or however much you’ve spent on student loan interest payments.

Here’s how it works…

To qualify – The student with the loan needs to be you, your spouse, or a dependent. That student needs to be enrolled at least half-time in pursuit of graduation.

The loan itself must be a commercial loan taken out specifically to pay for post-secondary education. The loan can be for any amount.

Claimable expenses – You can deduct interest payments you’ve already made on that commercial loan. You can also write off any one-time “loan origination fee” you paid to take the loan.

Expenses that don’t count – Payments toward the primary loan don’t count, and interest charges you have yet to pay don’t count.

To claim this deduction – You don’t have to file a separate form to claim this deduction! You can list it as one of your deductions in the “Deductions” section when you file your taxes.

You don’t have to itemize this deduction, either. It’s considered “above the line.”

Income limits – If you’re single with an adjusted gross annual income of $65,000, the total amount you can deduct for student loan interest payments changes. It starts to decrease, or “phase out.” For married households, this phase-out starts at an income of $135,000 per year.

If your single adjusted gross income is $80,000 or more, you can’t claim this deduction ($165,000+ if married).

What Does All of This Mean for Me?

If you’re in school getting your first ever college degree, you qualify for the best student tax credit. Use the American Opportunity credit for as long as you can.

Once you move on to grad school, or if you can’t attend school at least half-time anymore, you still qualify for the Lifetime Learner credit. You can’t have whatever remains of the $2,000 credit refunded to you, but this credit can reduce your IRS bill dollar-for-dollar.

If you took out a commercial loan to help pay for school and have started making interest payments, you can deduct those interest payments from your total taxable income.

Oh!

And one more very important thing to remember…

All of This Could Change Next Year

Congress and the IRS change tax credits and deductions all the time.

Remember when we said the American Opportunity credit used to be called the Hope credit? The Hope credit was non-refundable and could be applied to one year of college. Thankfully, it got renewed as the American Opportunity credit and now lasts four years.

There used to be an Education Expenses tax deduction, and a Tuition and Fees deduction. These both got replaced in 2018 with more elaborate tax credits.

So stay on your toes!

Just because you can file for all these today doesn’t mean they’ll be around next year.

Need Some Help?

Most people break into a cold sweat just hearing the letters I-R-S.

Getting a warning or an audit from the IRS can ruin your day. They certainly go out of their way to be intimidating, don’t they?

You don’t have to risk losing the money you’re owed by making a mistake on your taxes. Or, if you feel extra overwhelmed because you already owe back taxes—we understand.

And we can help.

Whether you need…

  • more clarification on a tuition tax credit
  • emergency relief from IRS actions
  • help managing tax payments
  • to stop a levee or wage garnish

we’ve got you covered.

Call us for a free consultation with a quality tax professional at (855) 245 – 8133.

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