Release Date: 2/4/2013
Clarksville, Ark. --- In late January and early February, students should keep an eye on their mailbox for Form 1098-T, "Tuition Statement." These forms, which are typically mailed to students in mid-January, can be key to taking advantage of the higher education tax deductions and credits offered by the federal government.
"Taking advantage of these education tax benefits is like receiving a scholarship "after the fact," said Jana Hart, Ozarks' dean of admission and financial aid. "These benefits can be easy to claim, and can help offset the expense associated with higher education."
One of the easiest to claim, Hart said, is the tax deduction for tuition and required fees. This deduction, reported on your income tax return, and calculated using IRS Form 8917, can reduce the amount of income subject to tax by up to $4,000. "The 1098-T will provide the information needed to claim a deduction or a credit," she said. "Also, keep the receipts for your text books, since they may count as an allowable expense as well."
Tax filers may also claim a deduction for interest paid on student loans used for higher education expense. This deduction can reduce the amount of income subject to tax by up to $2,500. Both of these deductions are taken as an adjustment to income, and thus can be claimed even by tax filers who do not itemize on their return. Because they reduce the amount of income subject to tax, they may also lower the amount of tax owed.
The "Tax Benefits for Education: Information Center" on irs.gov can be a good starting point for students and their parents who want to learn more about education tax benefits.
While deductions are one way to lower your tax burden, Hart said there are also two higher education credits that students should be aware of: The American Opportunity Tax Credit, and the Lifetime Learning Credit. Unlike a tax deduction, which reduces the amount of income subject to tax, a credit directly reduces the amount of tax owed. Thus, these higher education credits may allow individuals who are paying qualified higher education expenses for themselves, a spouse, or a dependent to receive credit for these expenses, reducing their tax liability, and in some cases, even resulting in a tax refund.
The American Opportunity Tax Credit was created by the American Recovery and Reinvestment Act (ARRA) as a modification to the existing Hope Credit, and originally applied only to the 2009 and 2010 tax years. However, the credit was later extended, and now applies for tax years 2011 and 2012 as well. The credit can be claimed for each student who incurs qualifying expenses during an eligible tax year.
The amount of credit available from the Hope Credit was based on tuition and related expenses required for enrollment or attendance at an eligible educational institution. The American Opportunity Tax Credit expanded the Hope Credit by adding required course materials to the list of qualifying expenses, and allowing the credit to be claimed for four years of post-secondary education, rather than two. It also increased limits on the modified adjusted incomes. This means that the tax credit is now available to more individuals and families, including those with higher incomes and those who owe no tax.
According to irs.gov, many of those who are eligible for the American Opportunity Tax Credit will qualify for the maximum annual credit of $2,500 per student. The credit reduces the amount of taxes owed, but unlike the Hope Credit, which is a non-refundable credit, up to 40% of the American Opportunity Tax Credit may be refunded to the taxpayer. The credit is available to individuals whose modified adjusted gross income is $80,000 or less. Married couples filing a joint return may be eligible for the credit with an adjusted gross income of $160,000 or less. The credit is phased out for taxpayers with incomes above these levels.
The Lifetime Learning Credit can also reduce the amount of income tax owed, allowing up to $2000 for qualifying educational expenses at an eligible institution. Unlike the American Opportunity Tax Credit, there is no limit on the number of years this credit can be claimed. However, the Lifetime Learning Credit is on a "per tax return" basis, rather than on a "per student" basis. In addition, the credit can only be used to offset taxes owed - it is a non-refundable credit, meaning none of the credit will be refunded to the taxpayer.
So which option should a student choose? Hart said that decision should be based on a comparison of different tax scenarios. She noted that students who deduct the cost of their tuition and fees may not also claim an education tax credit. She also said that if a student is eligible for both tax credits, the tax filer can claim either credit, but not both. However, Hart said that students and their parents should keep in mind that the tax filer could claim the American Opportunity Credit for one student, but claim the Lifetime Learning Credit for a second student on the same return. It is important for the tax filer should compare the benefits of the deductions compared to the credits, and even to compare the two credits to see which offers the most tax relief. "If you aren't sure if you qualify, ask your accountant," Hart emphasized. "You will never know if you don't ask. Take advantage of these benefits if you can!"
To learn more about these tax benefits for higher education, see the "Tax Benefits for Education: Information Center" on the IRS website.