Tax credits, deductions, and savings plans can assist taxpayers with their higher education expenses.
- A tax credit lowers the amount of income tax you may owe.
- A tax deduction reduces the total value of your income subject to tax, lowering the amount of tax you may have to pay overall.
- A tax exclusion means that you won’t have to pay income tax on the benefit you’re receiving, but you also won’t be able to utilize further tax-free benefits on it.
Who is eligible for Education Tax Benefits?
To be eligible for educational tax benefits, you must possess proof of educational expenses and file a federal income tax return.
A list of popular tax benefits that help offset the costs of college or career school (tuition, fees, books, supplies, and equipment) include:
- The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school while working toward a degree or similar credential.
- The Lifetime Learning benefit allows students to request up to $2,000 per year for tuition and fees at any college or career school they are enrolled in; the credit is meant to cover anything school-related, including books, supplies, and equipment purchased from the school.
- Qualified Tuition Programs (QTPs)
A state or a school establishes a QTP plan so that you can prepay or save for education-related expenses. If you are in college or a trade school and withdraw money from your account to pay for your education expenses, the money will not be taxed. To find out more about state QTPs, you have to enquire with the financial aid or admissions staff to see if the college you want to attend participates in a QTP.
- Deduction for Student Loan Interest
You can decide to deduct the interest paid on student loans you took out for yourself, your spouse, or a dependent. This benefit applies to all loans used to pay for higher education expenses. The maximum annual deduction available per qualified candidate is $2,500.
Some forms of financial aid are taxable income in addition to providing tax breaks. Earnings from federal work-study programs are treated the same as earnings from any other job. They are taxable earnings. Grants and scholarships may also be considered taxable income. You are advised to visit a tax advisor when looking into tax benefits you are qualified for and also save receipts for books and tuition.