Education Credits and Deductions

As taxpayers continue to wait for all their tax forms to arrive, let’s talk about what to do with one of those forms. Form 1098T is the tuition statement from colleges and universities telling what was paid for a student during the year and what scholarships and grants the college/university know the student received. Besides being one of the last forms to arrive, the 1098T is one that needs to most adjustment to come up with the correct deductions.

When dealing with a 1098T, I really like to see the account statement for that student. Luckily most schools have put student account info online and the student (or parents) can get a print out. It allows me to double check the out of pocket payments the taxpayer made. I’ve seen loans classified as grants, books treated as fees and payments made in December credited to January. What I want to do is to come up with the difference between the amounts paid for tuitions and fees that year and what the student received from grants and scholarships. But not all education expenses will be on 1098T so track them too.

There are currently 2 credits and 2 deductions for education expenses. Each has different requirements and limits. But there three basic rules for all; you can't be filing married filing separate, you can only use an expense once and only one credit/deduction per person (but a return could claim both credits and the Tuition deduction as long as they are the expenses of three dfferent people). And it goes without saying, the student must be the taxpayer, spouse, or dependent on the return unless the taxpayer could claim a dependent but chooses not to (student still can’t claim themselves). And the credits and the Tuition Fee Deduction have income phase outs to consider. A quick aside on the using expenses only once. If a distribution from a Qualified Tuition Program or Education Savings Account (Cloverdell) is taken, the expenses used to keep the distribution from being taxed are not eligible for the credits or deductions.

The American Opportunity Credit (AOC) is the beefed up Hope Credit. It’s available for the first 4 years of post secondary education. The student must attending a qualified school and be in a degree or certification program. The maximum credit per student per year is $2500. Up to 40% of the AOC can be refundable. This is the only education credit/deduction that included the cost of course related books and supplies. All the others are limited to tuition and course fees.

The Lifetime Credit maximum per return is $2000. But it includes non-decree course work and graduate school. But the classes must be at a qualified school and only tuition and fees qualify for the credit.

The Tuition and Fees Deduction is an adjustment to income and not a credit. A taxpayer can deduct up to $4000 in qualified expenses (tuition and fees) from a qualified school. And while not a credit, it may also reduce income on your state return.

Which credit/deduction is best? The one you qualify for - and that depends on the circumstances. I’d start with the AOC since it has the best tax benefit. Lifetime is the next logical step since it’s a credit. Then go to the Tuition and Fee Deduction. But what if you have some education expenses that don’t qualify for the other programs? Specifically, continuing education you have to take to maintain your job. Sometimes these are not offered through a qualified school and so can’t be used with the other credits and deduction. If the course was a job requirement and doesn’t qualify you for a better job, the tuition, fees and books could be a Miscellaneous Deduction on the Schedule A.

Education expenses can help you on your taxes but only if they meet specific qualifications. The key is to maximize the tax savings and that might mean running the numbers a couple of different ways to get the best legal result.

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Comments

[Mark Randall]

It is great that education is a tax credit. Do you know how it works if your employee is paying part of the tuition?

[Trish]

You can't take the credit for ed expenses that are paid(or reimbursed) by your employer