While we all know that education is a great investment in a person's future, many parents and students may not know of the monetary perks that paying for an education can bring them. Whether you're a brand new tax filer or a seasoned vet, you may not be certain about the different tax incentives that the federal government provides that can help defray the cost of higher education.

These incentives come in two different forms: tax credits and tax deductions. Tax credits reduce the amount of tax you are liable for, while tax deductions reduce the amount of income on which you pay taxes. In this post, we'll go over all of the incentives in both of these categories. More information can be found in IRS Publication 970 (http://www.irs.gov/pub/irs-pdf/p970.pdf).

 

Tax Credits

American Opportunity Tax Credit- Up to $2,500 per student

This credit offsets what you pay for the first four years of higher education by reducing the amount of income tax you pay. This credit is also partially refundable (up to $1,000 can be refunded if your credit is more than you owe in taxes).

Eligibility Requirements:

  • Modified Adjusted Gross Income (MAGI) of $90,000 or less ($180,000 or less for married couples filing a joint return).
  • Have a student that was enrolled at least half-time for one term in 2013 in an eligible program leading to a degree, certificate, or other recognized credential at an eligible school.
  • Claim within the first 4 years of post-secondary education (undergraduate).
  • Student cannot have a drug conviction (possessing or distributing a controlled substance).
  • Must file a tax return to claim the credit (even if you are not required to file taxes).
  • Only the person claiming the student is eligible to claim the credit.
  • You cannot claim this credit if you are claiming the Lifetime Learning Credit or the Tuition and Fees Deduction for the student.


Lifetime Learning Tax Credit- Up to $2,000 per tax return

This credit is available for all types of post-secondary education (helpful to graduate students) and can be used to offset what you pay for tuition and fees, as well as other required expenses (books, supplies, equipment). This credit, unlike the American Opportunity Tax Credit, is non-refundable (meaning the maximum credit is limited to the amount of tax you owe).

Eligibility Requirements:

  • Modified Adjusted Gross income (MAGI) of $62,000 or less ($124,000 or less for married couples filing a joint return).
  • have taken any type of post-secondary education (you don't have to be pursuing a degree or certificate to qualify).
  • Students with drug convictions can still qualify.
  • Must file a tax return to claim the credit (even if you are not required to file taxes) and have some income liability.
  • Only the person claiming the student is eligible to claim the credit.
  • You cannot claim this credit if you are claiming the American Opportunity Tax Credit.

 

Tax Deductions

Tuition & Feed Tax Deduction- Up to $4,000 taxable income reduction

If you are not eligible for the tax credits listed above, this may benefit you. This deduction amount depends on your income and the amount of qualified tuition & related expenses paid for eligible students (tuition, fees, books, supplies, equipment). This is an adjustment to your income, so you can claim this deduction even if you do not itemize deductions.

Eligibility Requirements:

  • Modified Adjusted Gross Income (MAGI) of $80,000 or less ($160,000 or less for married couples filing a joint return).
  • Have a student that was enrolled in one or more courses in 2013 at an eligible institution.
  • Must file a tax return to claim the deduction (even if you are not required to file taxes).
  • Only the person claiming the student is eligible to claim the deduction.
  • You cannot claim this deduction along with a credit for the same student.
  • You cannot claim this deduction if you are married and file taxes separately or if another person can claim you as a dependent on his or her tax return.

 

Student Loan Interest Deduction- Up to $2,500 taxable income reduction

This deduction allows you to deduct interest paid on student loans for yourself, your spouse, or your dependents. This deduction amount depends on your income and the amount of interest paid. This is an adjustment to your income, so you can claim this deduction even if you do not itemize deductions.

Eligibility Requirements:

  • Modified Adjusted Gross Income (MAGI) of $75,000 or less ($155,000 or less for married couples filing a joint return).
  • Made payments on a qualified student loan (used to fund a student enrolled at least half-time in an eligible institution, pursuing a degree, certificate, or similar program).
  • Must file a tax return to claim the deduction (even if you are not required to file taxes).
  • You cannot claim this deduction if you are married and file taxes separately or if another person can claim you as a dependent on his or her tax return.

 

What you'll need:

1098-T

This is a statement from MSOE that will detail tuition & fees that you have paid for the calendar year of 2013. We mail the statement to your permanent address on or before January 31st, 2014.

1098-E (for Student Loan Interest Deduction ONLY)

This is a form sent from the student loan lender to the borrower, detailing the amount of interest paid for the 2013 year. Statements are mailed to the address on file.

 

Question of the day: Are Scholarships & Grants Taxable?

Scholarships, grants, fellowships and other gift aid that you have received in 2013 that are reported on your 1098-T may need to be reported as taxable income in certain circumstances. In general, however, if you are pursuing a degree, certificate, or program of training toward gainful employment, and used the funds to pay for tuition, fees, or required books/supplies/equipment, then they should not be counted as taxable income. More information on this is found in Publication 970.