I’ve seen tears from a man that saved hundreds of dollars in taxes by deducting his student loan interest payments. If you’re putting your time, energy and dollars towards improving yourself, then you deserve a break on your income taxes. Even the IRS says so, and they don’t hand out cash very easily.
You can save a few tax dollars with these credits and deductions:
American Opportunity Credit (AOTC)
Lifetime Learning Credit (LLC)
Tuition and Fees deduction
Student loan interest deduction
Tax incentives are there to encourage smart spending – like on tuition, books and school expenses. But how do you know if you should go for the deduction or the credit, since you can’t do both? How do GET accounts or Coverdell ESAs get treated? Should you claim your college-age daughter as a dependent, or should she be filing a return on her own?
The numbers get complicated, so best to check with a tax professional to make sure you are maximizing the tax savings. A few simple things:
NO DOUBLE-DIPPING!! withdrawals from 529 plans can’t be deducted from taxable income. However, you and your dependent child may be filing separate returns, and that can work to your advantage when deciding on which approach to take.
INCOME LIMITS If you’re filing jointly with a taxable income of $180,000 ($90K for single folks) you can stop reading right here. No education credits for you! Things start getting phased out at the $130K level so if your AGI is below that number, no worries.
Here is a list of all the education-related tax incentives the IRS has to offer:
American Opportunity Credit (AOC) – Generally this is your best bet. A $2,500 credit on your tax bill for any tuition, books or fees paid out of pocket for an undergraduate student that is enrolled full-time.
Lifetime Learning Credit (LLC) – taking a creative writing class, or paying makerspace fees? Working your way through an master’s program, or a webinar workshop? The IRS will give you up to $2,000 back on your tax bill in return.
Student loans – Collectively, Americans owe more on student loans than they do credit cards. Even Social Security checks are being garnished for student loan payments! At least those interest payments are deductible.
IRA plans – early withdrawal penalties don’t apply if you spend the money on college.
Tuition and Fees deduction – if your AGI is too high to qualify for the LLC, you can still avoid paying taxes on those dollars with this deduction.