If you're a student, you may qualify for several specific education tax credits. There are also a number of additional resources available for students such as the Free Application for Federal Student Aid (FAFSA), federal grants, and scholarships that can help you pay for your education.
Applying for Aid Using the FAFSA
Aside from education tax credits, there are a number of ways the U.S. government helps students fund their education. These opportunities come in the form of grants, scholarships, low-interest loans, and work-study programs. The amount of aid depends on the student's income, and on their parent's income if the student is a dependent. Filling out the Federal Application for Financial Aid (FAFSA) will determine how much aid and what kinds of aid you qualify for.
Starting in 2016, students could submit the FAFSA starting in October for the following school year (for example, you could submit beginning in October 2018 for the 2019–20 school year). Previously, applications were not accepted until January. This is possible due to a major change in the income reporting requirements for the application. Instead of reporting last year's income, students are required to report their own and their parents' income from two years ago. For example, if you're going to start school in 2019, you will now report income from 2017 instead of 2018.
This change means applicants no longer have to wait until the IRS has accepted their tax returns for the previous year, which also means students can apply for aid much sooner. Now students can make a more informed decision about which school they want to attend based on the aid they will receive.
Generally, students, their parents (if the student is a dependent), and spouses qualify for education tax credits. The student or the parent (but not both) can claim these expenses to utilize the credit that provides the best results for their unique tax situation.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is one of the primary deductions students can claim on their taxes. The credit is for a maximum of $2500 per year for the first four years of higher education. If the tax credit brings the student's tax liability to below zero, the student or their paying parent can receive up to a $1000 refund.
To qualify for the AOTC, the student must be pursuing a higher education degree at a credentialed school and be enrolled at least half-time for one academic period (semester, quarter, etc.) during the tax year. For the American Opportunity Education Credit, the school or university's EIN must be included on form 8863, or the return will automatically be rejected. The full credit is not available for taxpayers with an AGI above $80,000 for single filers and $160,000 for joint filers.
Lifetime Learning Credit
If you aren't a full-time student but are taking professional degree courses to improve job-related skills, you can claim the Lifetime Learning Credit. Qualifying taxpayers can claim as much as 20 percent of qualifying expenses up to $10,000 ($2000 total credit) in education-related expenses for credentialed programs, regardless of how many years of higher education they've received previously. The full credit is not available for taxpayers with an AGI above $57,000 for single filers and $114,000 for joint filers.
The government funds several federal grants for students, including the Pell Grant and others. These grants do not have to be reported as taxable income as long as they're used for education-related expenses, such as tuition, books, and equipment. However, any part of the grant used for room and board or travel for educational reasons must be reported as income.
State and Federal Student Loans
State and federal student loans do not need to be reported as taxable income. Once they begin making payments on the loans after leaving school, students may qualify for a student loan interest deduction, depending on their tax bracket.
Although enrolling in a higher education program costs money, there are a number of ways to ensure you're paying less. By taking advantage of education tax credits and financial aid offerings, you'll be able to receive an education without spending as much of your own money.
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