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Education Tax Tips for 2013

Michael Lux Blog, Money Saving Tips, Student Loans 12 Comments

As fall arrives and millions of students attend college, now is a great time to take a quick look at the various tax incentives that the Federal Government offers to help pay for education.  With just over three months left in 2013, there is still time to make sure that you are able to take advantage of these programs.

American Opportunity Tax Credit

The American Opportunity Tax Credit provides up to $2,500 per student for their first four years of post-secondary education.  The cool thing about this money is that it is a credit rather than just a deduction.  If this money was just a deduction, it would just mean your yearly taxable income was reduced by $2,500, but because this is a credit, it means you will owe $2,500 less in taxes next year.  This refund phases out for individuals making over 80k and couples making over 160k.

One great thing for college students about this program is that even if you owe zero dollars on your taxes, you can get up to 40% of it as a refundable tax credit.

For those of you that are wondering, this program was slated to end for tax year 2012, but due to legislation passed in May, it will continue until 2017!

For further reading, check out the IRS info page on the American Opportunity Tax Credit.

Lifetime Learning Credit

With the Lifetime Learning Credit, you can claim up to $2,000 on your federal tax return for qualified education expenses.  You are able to collect 20% of your eligible education expenses (which adds up to a max of $2,000).

This credit starts to get confusing when you deal with multiple students or try and combine it with the American Opportunity Tax Credit.  Rather than try and break down the exact details for the many different possible scenarios, the best thing you can do would be to go to the IRS website, where they have a calculator to help you find out what you qualify for and how to maximize your benefit.

Like the American Opportunity Tax Credit, the Lifetime Learning Credit phases out at the same income levels.  The neat thing about this credit, as its name suggests, is that you can take it every year for life.  Unlike the four year limitation on the American Opportunity Tax Credit, as long as you are learning you can the Lifetime Learning Credit.

For a detailed breakdown on who is eligible and what expenses are eligible, be sure to check out the IRS Publication on the Lifetime Learning Credit.

Student Loan Interest Deduction

While a deduction is not as nice as a credit, it does still save you money.  Typically interest is not deductible on your taxes, but in the case of student loans and mortgages, Uncle Same gives you a break.

The Student Loan Interest Deduction reduces your taxable income by up to $2,500 per year.  In order to get the full value, you must have paid $2,500 in interest alone on your student loans.  This deduction applies to both federal and private student loans.

One nice feature about this deduction is that you do not have to itemize your taxes to get it.  That means you can still take your standard deduction on the 1040EZ AND get the student loan interest deduction.

For further reading be sure to check out the IRS Tax Topic on the Student Loan Interest Deduction.

Final Thought

Taxes are no fun.  They combine the trill of paperwork with the pleasure of paying bills.  However, if you plan ahead, you can use the above programs to your benefit.  Saving some cash next April is definitely worth a little bit of work today.

Readers: Have you taken advantage of the above programs?  Can you offer an education tax tips?

  • I love getting tax deductions and credits. Apart of me does find taxes kind of fun…I am an odd person. I think the student loan deduction shouldn’t necessarily have income limits. Maybe it should be based on the amount of debt and your income. I think for a single person, the deduction phases out at $60,000. If you have over a $100,000 in student loan debt, $60,000 isn’t that much and the benefit of the deduction would be very helpful.

    • Taxes are fun? You are nuts Andrew! The only thing I like about taxes is the refund check… IF I get a refund.

      Your point about the deduction phase out is a really good one. Hopefully Congress will consider changing the law to benefit a few more people.

  • Barb Friedberg

    This is a really important topic and can mean much lower taxes. Our family benefited from this tax treatment when my daughter was in college and I was getting a second Masters degree.

  • I have not personally taken any of these credits, but they’re definitely great for anyone who can qualify. Anything you can do to lower the cost of education is a plus for sure.

    • Very true Matt. The cost of education is getting out of control, so even if these credits are not a ton of money, every little bit helps.

  • squirrelers

    It’s always good to keep up with opportunities for tax credits, particularly with an expense such as education. It sure isn’t getting less expensive from what I can tell. I took advantage of loan interest deduction some years ago.

    • I’ve used the student loan interest deduction as well. It didn’t make huge difference in my taxes, but it was very easy to do and it saved me some money.

  • Paul @ The Frugal Toad

    My son is in college this year and we will need to take a closer look at this soon! You mentioned combining the AOTC with the LLC, I was under the impression you can take one or the other but not both?

  • I’m not a tax expert, so I don’t know for sure, but I recall reading that combining them could be done if you had multiple children in college. I’d suggest you go here: http://www.irs.gov/uac/Am-I-Eligible-to-Claim-an-Education-Credit%3F

    The IRS website should be able to help you figure out how to maximize your deduction.

  • MoneySmartGuides

    I’ve taken advantage of both tax credits – one for undergrad and the other for gad school. I’ve also written off some of my student loan interest on my taxes. When I first graduated, I was taking my time paying off my student loans, just so I could get the deduction on my taxes. Once I learned that I wasn’t getting a dollar for dollar reduction, I began to pay more than the minimum so that I could get rid of them.