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.
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?