If you’re a student, you may qualify for specific tax deductions that can ultimately help you with the cost of your schooling. There are also a number of additional resources available for students in the form of federal grants and scholarships. Study these examples closely, and you just might find ways to pay less for your education.
Tax Deductions for Students
Aside from the education credits listed below, students may be able to deduct up to $4,000 a year toward the costs of tuition and fees related to being enrolled in an accredited college, university, or program. These deductions may include costs for computer equipment and education-related technology.
Students, their parents (if the student is a dependent), and spouses usually qualify for student tax deductions. The student or the parent (but not both) can claim tuition and fees. Similarly, tuition costs can be deducted as an education expense or as part of one of the education credits, but not both.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is one of the primary tax deductions for students that they can claim on their tax return. The credit is for a maximum of $2,500 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 $1,000 refund.
To qualify for the AOTC, the student must be pursing a higher education degree at a credentialed school and be enrolled at least half of the 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.
Lifetime Learning Credit
If you aren’t a full-time student but are taking professional degree courses at an eligible educational institution to improve job-related skills, you can claim the Lifetime Learning Credit. Qualifying taxpayers can claim up to $2,000 in education-related expenses for credentialed programs, regardless of how many years of higher education they’ve received previously.
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. Students may qualify for a student loan interest deduction after leaving school, depending on their tax bracket.
Applying for Aid Using the FAFSA
Aside from education deductions and 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 2017 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 2017, you will now report income from 2015 instead of 2016. This change means applicants no longer have to wait until the IRS has accepted their tax returns for the previous year. In turn, this means students can apply for aid much sooner. This gives students the ability to make a more informed decision about which school they want to attend based on the aid they receive.
Even though enrolling in a higher education program costs money, there are many ways to ensure you’re paying less. By taking advantage of education tax credits, financial aid offerings, and tax deductions for students, you’ll be able to receive an education without spending as much money.
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