Back to School and Taxes

September, 01 2015 by Eric Linden

"Back to school " season - I sure disliked that phrase as a youngster. I mean, what kid didn't? School was the dreaded word in our youth - but then, as we became clock-punching, cube-dwelling, water-coolering, office-loving employees, we learned about a new nemesis: taxes.

Yeah - TAXES replaced SCHOOL as the thorn in our existence (okay, yeah, there are a few other thorns but you get my point). I am here to put these two topics together in a way that may result in a little tax happiness. So take a minute and read on if you or someone else on your tax return is going to college - even if they are just taking one class!
 

The American Opportunity Tax Credit OR Lifetime Learning Credit are the keywords you need to know. These tax credits are an option for folks who pay qualifying expenses for eligible students. You can qualify for both - however, you cannot claim both for the same student in the same year. In addition, you need to subtract the amount of any tax-free educational assistance you receive (e.g., a grant) from your qualified expenses.
 

These credits apply to eligible book worms enrolled at:
 

Eligible colleges, universities, vocational schools, and other qualified institutions, both non-profit and for-profit.
 

A few other tidbits you need to know regarding the American Opportunity Tax Credit, per the IRS website:

• The credit is only available for four tax years per eligible student (there is that word again!).
• The credit is available only if the student has not completed the first four years of post-secondary education at the beginning of the tax year.
• The student must be pursuing a degree or "other recognized education credential. "
• The student must be in school at least half-time.
• The student must not have been convicted of a federal or state for possessing or selling drugs.

The Lifetime Learning Credit, on the other hand, is NOT limited to the first four years of college.

There are some other highlights as well:
 

     What Are The Annual Limits?
 

• American Opportunity Credit - $2,500 credit per student
• Lifetime Learning Credit - $2,000 credit per student

     What Expenses Qualify Aside from Tuition And Required Enrollment Fees?
 

• For the American Opportunity Credit – Course-related books, supplies, and equipment (e.g., computers)
• For the Lifetime Learning Credit – Amounts paid for course-related required books, supplies, and equipment. These amounts must be paid to the institution for enrollment. Same as above.

The third tax benefit for education expenses is the Tuition and Fees deduction, which was extended through 2015. It gives you an "above the line" deduction (i.e., a taxable income reduction) of up to $4,000. The rules differ slightly from the two credits mentioned above, so be sure to review the rules carefully when attempting to identify what will work in your particular tax situation. Care and attention is required, as taxes are complex and there are many grey areas. Also keep in mind that this is not a complete list of rules and requirements for these credits and deductions. But you are in luck! Our partner, TurboTax, has tax software that can help. TurboTax has an Education Optimizer that will help you determine which tax breaks you qualify for and which one will save you the most money.
 

College costs have skyrocketed in past decade, and any little bit of tax deduction help is a welcome respite from these crushing expenses. We wanted to let you know that, yes, there are some tax benefits to "hitting the books." You just need to educate yourself in order to see what deductions are out there.

We hope this blog answers some of your questions and gets you thinking about what could be possible in your particular tax situation. So as some of us go back to school in 2015, a tax deduction or two can help lessen that education financial bite.